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A N D I T S P O S S I B L E E F F E C T O N
I N V E S T M E N T A N D O P E R A T I O N A L D E C I S I O N S O F A M E R I C A N M A N U F A C T U R I N G
O P E R A T I O N S I N C H I N A
The U.S. – South Korea Free Trade Agreement
Johan L. Claasen II
Agenda
Introduction
Methodology
Literature Review
Survey
Discussion of Results
Conclusion
Introduction
First free trade agreement in East Asia for the U.S.
Most significant FTA since NAFTA
How will the existence of this FTA affect American companies as they decide where to locate operations in East Asia?
The Chinese Economy
GDP Growth Rates Exceeding 10% annually
Quality issues
Multiple Recalls
Weak IP Protection
Piracy
Rising Costs
Currency appreciation
Reducing tax rebate
Raising Wages
The Korean Economy
11th Largest Economy
One of the world‟s most high-tech markets
Exports include: Semi-conductors
Cars
Computers
Wireless Communication
Largest companies Samsung
LG
Hyundai
The U.S. – South Korea FTA
Eliminates tariffs on 95% of all products
Opening to foreign investment
Expedited custom procedures
Strengthened IP protection
Dispute settlement mechanisms
Agenda
Introduction
Methodology
Literature Review
Survey
Discussion of Results
Conclusion
Methodology
Literature Review of Academic Journal Articles
Case Studies of previous FTAs on non-participating countries
Interviews with San Diego Chamber of Commerce and San Diego World Trade Center
Interviews with companies
Agenda
Introduction
Methodology
Literature Review
Survey Results
Discussion of Results
Conclusion
Terminology
Trade Creation
“the goods produced locally in each country are replaced by goods that are more efficiently produced in the partner country to the agreement”
Trade Diversion
“the increased trade between countries forming the preferential trading agreement comes at the expense of trade formerly with third countries.”
Viner, J. (1950). The Customs Union Issue. Carnegie Endowment for International Peace .
Effects of Other Free Trade Agreements
NAFTA
Expansion of the maquiladora industry
Mexico became a full-package manufacturer
North American apparel employment by country
82.6% 79.5%75.6%
60.3%49.3%
10.8% 15.9%
18.0% 33.3%
43.4%
6.6%4.6%
6.5%6.4%
7.3%
0
200
400
600
800
1,000
1,200
1,400
1,600
1985 1991 1994 1997 2000
To
tal
Em
plo
ym
en
t (i
n 0
00
's)
Canada
Mexico
United States
Bair, J., & Gereffi, G. (2003). Upgrading, uneven development, and jobs in North American apparel industry. Global Networks.
Effects of Other Free Trade Agreements
NAFTA U.S. exports to Mexico
1990 = 7.1%
1994 = 10.4%
Mexican exports to U.S.
1990 = 78.8%
1997 = 85.4%
Canadian exports to U.S.
1990 = 75.0%
1997 = 82.4%
European market share in Mexico
1990 = 17.4%
1997 = 9.0%
Krueger, A. O. (1999). Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist? Journal of Economic Perspectives , 13 (4), 105-124.
Effects of Other Free Trade Agreements
European Union (EU15)
Exports destined for one of the other member countries
1963 = 56.3%
1997 = 60.8%
Imports from one of the other member countries
1963 = 51.8%
1997 = 67.6%
Krueger, A. O. (1999). Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist? Journal of Economic Perspectives , 13 (4), 105-124.
Effects of Other Free Trade Agreements
Mercosur (Argentina, Brazil, Paraguay, Uruguay)
Exports destined for one of the other member countries
1990 = 8.9%
1997 = 24.4%
Imports from one of the other member countries
1990 = 14.5%
1997 = 20.5%
Krueger, A. O. (1999). Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist? Journal of Economic Perspectives , 13 (4), 105-124.
Agenda
Introduction
Methodology
Literature Review
Survey
Discussion of Results
Conclusion
Survey Methodology
Designed a questionnaire – maximum relevant info
Range of cpys
Industries:
Textile
Bio-tech
Technology
Life Sciences
Public
Agenda
Introduction
Methodology
Literature Review
Survey
Discussion of Results
Conclusion
Discussion of Results
Manufacturing operations = Strategic decision
Investment in terms of production output
Korean productivity < Chinese cheap labor
IP highest priority
Other considerable factors: Cost < Productivity
Market Research
Global client network
Client quality
Supply Chain
Target Market
Discussion of Results - 2
Answers is industry driven
Many cpys unaware of details of KORUS
Making LT decisions; play „follow the leader‟
Agenda
Introduction
Methodology
Literature Review
Survey
Discussion of Results
Conclusion
Conclusion
Literature review :
Creating trade between US and Korea
Divert trade away from China
Survey results:
Not immediate reaction for trade diversion from China
Not decisive decision factor for FDI
Conclusion - 2
Recommendation:
High-tech products focus on Korea for Key Component manufacturing
Pharmaceutical
Technology
Low-tech product portions remain in China
KORUS makes Korea another viable option for the Global Supply Chain
Questions?
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