MARCH 2006 QUARTERLY TRADE MEETING: AGENDA-SETTING

UNCLAS SEOUL 000864

SIPDIS

SENSITIVE
SIPDIS

PASS USTR FOR CUTLER, AUGEROT AND KI
STATE FOR EAP/K AND EB/TPP/BTA
COMMERCE FOR 4431/ITA/MAC/EAP/DUTTON
USDA FOR APHIS/ALFALLA
USDA ALSO FOR FAS/ITP/CLAUS AND GRUNENFELDER

E.O. 12958: N/A
TAGS: ETRD ECON KS
SUBJECT: MARCH 2006 QUARTERLY TRADE MEETING: AGENDA-SETTING


SUMMARY
--------------


1. (SBU) The first Quarterly Trade Meeting (QTM) for 2006
was held in Seoul on March 3. While there were no
breakthroughs, the meeting was constructive and identified
no new problems. The Korean government indicated a
willingness to address USG concerns, including a potentially
serious problem related to government regulation of secure
software sales. The U.S. delegation flagged the
unhelpfulness of Korean courts' unwillingness to provide
injunctive relief, especially in cases related to patents
and IPR. Our long-standing broadcasting and pharmaceuticals
pricing and reimbursement concerns were discussed in some
detail, but will henceforth be handled in the FTA
negotiations. We received repeated calls for concessions on
issues holding symbolic value for the Korean government,
especially unshu oranges and ginseng chicken soup. The
Korean government committed to continue the QTM process
throughout this year's FTA neotiations, but sought to
tamper USG expectations concerning the amount of attention
the QTM would receive given the heavy FTA workload. End
Summary.


2. (U) The U.S. delegation was led by USTR Senior Director
for Korea Scott Ki, who was accompanied by Jeffrey Dutton
from Commerce, Cheryl Claus from USDA and Steven Chan from
State. Roughly twenty Embassy staff participated in various
segments of the four-hour QTM discussion. The Korean
delegation was led by MOFAT North American Trade Division
Director Lee Seong-ho, who was supported by colleagues from
MOFAT, Ministry of Finance and Economy (MOFE),Ministry of
Agriculture and Forestry (MAF),Ministry of Information and
Communication (MIC),Ministry of Health and Welfare (MHW),
Korean Intellectual Property Office (KIPO),Korea Food and
Drug Administration (KFDA),Korean Broadcasting Commission
(KBC) and other ROKG offices. MOFAT and USTR have
temporarily shifted their leads for the QTM from the
Director-General level to the Director level for the
duration of the U.S.-Korea FTA negotiations.


3. (SBU) The QTM agenda comprised:

-- Agriculture: Follow-up on access for beef including non-
beef ruminant products; concerns related to implementation
of the WTO rice agreement; threshold levels for adventitious
presence of genetically modified organisms (GMOs) in
processed organic foods;

-- Regulatory Issues: Regulation of sales of secure
software; Korea Post insurance regulation; dubbing and
advertising restrictions in satellite retransmissions;
cooperation with Regulatory Reform Committee;

-- Pharmaceuticals and Medical Devices: Update on MHW review
of A7 pricing decisions and progress toward identifying core
criteria for pricing decisions; follow-up on MHW plans to
work with industry to develop independent appeals system and
improved written justification for pricing decisions; Lyrica
reimbursement guidelines; follow-up on the industry paper on
reimbursement rates of medical devices submitted to the ROKG
in previous QTM; clarification on reimbursement guidelines;

-- Intellectual Property Rights: Patent infringement cases
and lack of injunctive relief; KIPO decisions being
overturned by Patent Court;

-- Korean Issues: Unshu oranges; ginseng chicken soup; visas
for Korean nurses working in U.S. hospitals; and diamond saw
blade U.S. anti-dumping investigation.

CONTINUING THE QTM PROCESS: DIFFICULT, BUT NECESSARY
-------------- --------------


4. (SBU) The formal discussions were preceded by a courtesy
call on MOFAT Director-General for Bilateral Trade Lee Geun-
tae. DG Lee expressed satisfaction with the handling of
events leading up to the announcement of FTA talks on
February 2. Lee confirmed that MOFAT is happy to maintain
the QTM process, despite the human resource cost, as it
provides a useful, parallel process to resolve trade
concerns that might not fit into the context of upcoming FTA
negotiations. Lee cited the example of the stalled Korea-
Japan FTA negotiations; Japan and Korea suspended their
periodic bilateral trade discussions with the advent of
those negotiations, and now both sides are struggling to
resume non-FTA trade discussions. Acknowledging the strain
that would be placed upon both ROKG and USG resources in
maintaining the QTM and FTA processes simultaneously, Ki
explained that the USG will remain flexible on the venue and
manner of future QTM discussions, perhaps arranging them
around the margins of future FTA rounds.

AGRICULTURE
--------------


6. (SBU) To open discussion at the QTM meeting itself, each
side acknowledged both the importance of the upcoming FTA
negotiations, and the progress made on key trade issues
leading up to the FTA announcement -- including beef, screen
quotas, and automobiles. Director Lee thanked the U.S. for
resolving the longstanding issue of access for Korean
paprika (peppers) to the U.S. market.


7. (SBU) Beef: Ki thanked Korea for the progress made so far
on the resumption of beef exports to Korea. He also noted
the importance of cooperating closely to arrange for the
auditing of U.S. meat processing plants by Korean experts,
and urged Korea to begin the audits as soon as possible. In
addition, Ki noted that Charles Lambert, Acting Under
Secretary for Marketing and Regulatory Programs at USDA, was

SIPDIS
expected to come to Korea on March 6 to clarify the audit
process. Director Lee acknowledged that there had been some
delay in arranging the audits due to "administrative"
issues. He indicated that Korea wished to take a step-by-
step approach since there was still some concern on the part
of Korean consumers about the safety of U.S. beef.


8. (SBU) Rice: Ki thanked the Korean side for completing the
U.S. portion of the 2005 minimum market access rice tenders
and asked for details on the 2006 tenders. Lee Seong-ho
responded that the 2006 tenders would be drawn up based upon
the results of the 2005 tenders, for all countries, a task
which has not yet been completed. Yoon Dong-Jin, Director
of MAF's Bilateral Cooperation Division, asked that the
United States be patient, since this will be the first time
that foreign rice will be available to the Korean consumer.
Ki pressed for a possible timeline for the 2006 tender, and
the Korean representatives at the QTM responded by
reiterating that the 2005 tender process must be completed
before a timeline can be set.


9. (SBU) Ki noted USG concerns about the terms of the 2005
tender, in which nearly 95 percent of the U.S.-specific
quota called for "U.S. Grade 3 or better" quality rather
than "U.S. Grade 1" quality. Ki explained that the United
States produces little, if any, Grade 3 quality rice. U.S.
exporters had no choice but to submit bids for Grade 1 rice,
which raised the risk that the bids might be rejected by
Korea due to the higher price. Ki also asked for
clarification regarding the mechanism Korea uses to
determine price ceilings on tendered rice.


10. (SBU) MAF's Director Yoon acknowledged the U.S.
concerns, but stated that individual country concerns would
not be addressed until the Korean consumer response to the
imported rice could be gauged. MOFAT Director Lee reassured
Ki that MOFAT recognizes that it would not be to Korea's
benefit to allow the United States' country-specific quota
to revert to global quota. Lee underlined Korea's
commitment to the issue, and stated that he did not
anticipate any problems in filling the country specific
quota for the United States. Ki asked if U.S. rice would
have to be labeled as "Grade 3 or better," or if it could be
labeled as "Grade 1" quality. After first suggesting that
there were no labeling requirements, the Korean delegation
clarified that labeling requirements would be based on the
terms included in the tender. Yoon stated that it would be
difficult to change the labeling requirements specified in
the tender invitation for the 2005 quota, but said that the
U.S. concerns would be taken into account for 2006 quota.


11. (SBU) Adventitious Presence of GMO's: Commenting on U.S.
concerns that Korea's current regulations allow no tolerance
for adventitious presence of genetically-modified (GM)
material in processed organic food producQ, MOFAT's
Director Lee and representatives of KFDA (which handles
processed organic food issues) stated that there are
currently no plans to change Korea's system "so far." They
added that Korea is considering Qplementation of a process-
based organic certification process in the near future.
KFDA officials also reiterated that regulations stipulate
that processed food can not be labeled as organic if it
contains any traces of GM material. KFDA added that if a
global standard were to be devised, they would consider
revising their labeling criteria.

AGRICULTURE: KOREAN CONCERNS
--------------


12. (SBU) Unshu Oranges: MOFAT Director Lee asked for an
update on the status of Korea's request for access for
Korean unshu oranges to Alaska. Lee said while there is "no
real commitment to export to Alaska," this issue has become
a "symbolic importance" for the Korean FTA stakeholders.
The USG APHIS representative confirmed our commitment to
complete the risk assessment for unshu oranges to Alaska.


13. (SBU) Ginseng Chicken Soup: Director Lee pointed out
that it has been 12 years since Korea first raised the issue
of Korean ginseng chicken soup, stating that although the
World Organization for Animal Health (OIE) guidelines permit
the trade of cooked, sterilized poultry meat, the United
States is not using the OIE guidelines in this case.
(Background Note: Although Korea first raised its interest
in exporting ginseng chicken soup to the United States in
1994, it abandoned its efforts due to lengthy regulatory
requirements. Korea raised the issue again in 2004).
Director Lee pointed out that the United States emphasizes
following OIE guidelines for the beef trade, but has not
followed OIE guidelines in the case of Korea's request to
export ginseng chicken soup to U.S. markets. Lee added that
this issue had been discussed in Korea's National Assembly
and that Assembly members believe Korea to be trying its
best to address U.S. concerns, but that the U.S. is not
reciprocating. Ki replied that the United States recognized
the importance of the issue to Korea and that we would
indeed "do our best" to resolve the ginseng chicken soup
issue.

REGULATORY ISSUES
--------------


14. (SBU) Information Technology Security Products: Ki
outlined grave USG concerns over the fact that Korea's
National Intelligence Service (NIS) has drafted overly-
protective information technology regulations, which is
negatively affecting sales of U.S. I.T. products containing
security features. Ki urged NIS officials to attend
bilateral briefings in Washington offered by the USG, before
finalizing relevant ROKG policies on government procurement
of I.T. products containing security features. In response,
an NIS representative stated that NIS representatives could
not attend the March session as planned, but indicated that
a trip in April would be possible. The U.S. delegation
raised concerns that, since NIS was planning to issue its
"implementation manual" regarding how to properly implement
I.T. security product guidelines at the end of March,
rescheduling the session to April would be too late. NIS
replied that it would be no problem to delay release of its
"manual" until after it had attended the information session
in Washington.


15. (SBU) The NIS representative also said that following
Korea's accession to the Common Criteria Recognition
Arrangement (CCRA),ROKG policies would be changed to be
made in line with CCRA tenets concerning source code review.
(Background Note: In addition to the question of following
CCRA tenets, also important are the Financial Supervisory
Service's regulations requiring that private sector
financial firms only purchase IT security products that have
been vetted according to the NIS system. There also
continue to be concerns related to the breadth of the
"government agencies" that should abide by the program. End
Background Note.)

16. (SBU) Korea Post: Ki prefaced that the U.S. side
realizes that the issue of participation by Korea's post
office in the banking and insurance sectors remains a
delicate one for Korea. But he explained that U.S.
insurance, banking and financial services firms continue to
complain that Korea Post enjoys unfair practical and
regulatory advantages, and uses those advantages to advance
in the Korean market at the expense of private providers.
Korea Post, a Korean government enterprise, is now the
fourth-largest life insurer and eighth-largest banking
entity in Korea. Ki asked what progress had been made in
implementing the plan to appoint a Task Force to explore
Korea Post's privatization, which had been announced in

2003.


17. (SBU) Deputy Director Kang Sung-tae of Korea Post's
Postal Insurance Planning Division defended the postal
service's financial businesses as a "not-for-profit" part of
the ROKG social welfare system, originally set up to assist
Korea's urban poor and far-flung rural populations. Kang
indicated that while Korea Post is indeed supervised by the
Ministry of Information and Communications (MIC) rather than
the Financial Supervisory Service (FSS),this was slowly
changing. In December 2005 a new law was passed that allows
MIC to request oversight assistance from the FSS. The
timeline to explore any privatization of Korea Post,
however, has been pushed back until after 2007, and would be
"subject to negotiations after that time" between MIC and
the FSS.


18. (SBU) Korean Head of Delegation Lee Seong-ho summed up
the difference between U.S. and Korean perceptions of Korea
Post's non-postal businesses: "You think of this side of
Korea Post's work as a financial institution, while we think
of it as a part of our welfare system." That said, Lee
indicated the Korean side had taken notice of U.S. concerns
and would revisit the issue in the future. Ki, in response,
underscored that U.S. concern is based on a solid trade-
limiting argument. Korea Post competes against the private
sector on a non-level playing field. Short of
privatization, at a minimum, Korea Post should be subject to
the same product and prudential regulations as private
sector banking and insurance institutions.


19. (SBU) Regulatory Reform Cooperation: Ki applauded Korean
officials for their willingness to set up a regular channel
for detailed communication with the American Chamber of
Commerce in Korea and the U.S. Embassy, as part of the
ROKG's ongoing regulatory reform review. In response,
Government Policy Coordination Deputy Director Jung Sang-
bong said that cooperation should continue. But he also
stressed that the ROKG views the cooperation as a
contribution to regulatory reform, rather than as a part of
the U.S.-Korea trade policy process.

PHARMACEUTICALS AND MEDICAL DEVICES
--------------


20. (SBU) DOC Dutton asked for an update on any progress
Korea has made in carrying out its review of A7 pricing
decisions, following the October 2005 QTM. MHW Health
Insurance Reimbursement Division Director Park said that his
ministry is currently still reviewing the A7 pricing
decisions made since 2000, but said the process would take
some time since there are many products and a large amount
of data to review. As promised by MHW at October 2005 QTM,
Director Park said that once the review was complete, MHW
would consult with industry concerning A7 pricing criteria.


21. (SBU) Dutton also raised the issue of setting up an
independent appeals process for pricing and reimbursement
decisions. The ROKG had declared its support of developing
such a process at the October 2005 QTM. Park replied that
there has been no substantive progress since the last QTM in
developing an independent appeals system. He said that MHW
was still reviewing internally what could be done. Park
assured Ki, however, that MHW was currently close to
completing a template for a written justification for
pricing and reimbursement decisions that the ministry would
soon be ready to share with industry for comments. Ki
emphasized that MHW should expedite its development of the
appeals system and work closely with industry throughout the
process.


22. (SBU) Dutton also asked about the status of Lyrica, a
neuropathic pain medication developed by a U.S. company,
specifically inquiring about whether reimbursement
guidelines had been set. Park said that Lyrica has been
eligible for reimbursement since March 1, and that there is
a continuing review of related processes. Park replied that
any further details will be handled by the U.S. company and
the corresponding organization "on our side."


23. (SBU) Departing from the set agenda, Ki raised recent
industry concerns about MHW's announcement that it was
considering a switch to a "positive list" system for the
National Health Insurance's reimbursement list. MHW
responded that there had been no concrete decision made on
when or how to implement such a positive list system. MHW
explained that many of the over 20,000 drugs on the
reimbursement list had overlapping functions and efficacies,
and needlessly complicated management of the system. Park
added that he did not believe a positive list system would
disadvantage any specific company. However, since MHW
recognizes that such a switch would affect all companies, he
assured us that MHW planned to consult closely with
industry. Ki and EconMinCouns emphasized strongly that any
concrete plan to switch to a "positive list" reimbursement
system was certain to intensively worry pharmaceuticals
importers.


24. (SBU) Medical Devices: Dutton also raised the issue of
reimbursement policies for medical devices, asking if the
Korean side had looked into the industry paper -- provided
at a previous QTM -- that showed that in most instances
imported medical devices receive a lower reimbursement rate
than domestically-manufactured ones. MHW Trade Cooperation
Division Director Bae responded that since this item had not
been included on the agenda, MHW had not been able to
prepare an answer to this question and could therefore not
respond at this time. Dutton asked for updates on MHW's new
reimbursement guidelines for medical devices. Bae noted that
the guidelines were in fact not new, but were made
"official" from the existing guidelines. Bae said MHW will
create a task force to study the reimbursement guidelines
and plas to convene the first task force meeting in May.

INTELLECTUAL PROPERTY RIGHTS
--------------


25. (SBU) Ki emphasized to the ROKG delegation that
improving IPR enforcement in Korea has been an important
issue for a long time. However, while all intellectual
property issues are important, only two aspects of IPR
protection would be discussed during this session of the
quarterlies -- the lack of injunctive relief, and the harm
caused to patent holders by the Patent Court overturning
KIPO rulings.


26. (SBU) The U.S. side expressed concern about an
increasing volume of industry complaints that Korean
authorities could not (or would not) provide injunctive
relief in patent disputes through administrative channels,
such as the Korea Intellectual Property Office. Similarly,
Korean civil courts appear to never provide injunctive
relief, even though that authority exists. Ki expressed
concern that U.S. companies were not being protected during
patent disputes because the alleged infringers were not
being prohibited from continuing the action in question.
Absent injunctive relief, he pointed out that even when
protection was afforded by a favorable decision at lower
levels, that protection was often negated by the fact that
the defendant merely had to file an appeal in order to
continue the infringing behavior. Ki encouraged the Korean
delegation to consider including a fix in the ROKG's "IPR
Master Plan," constructing the relevant statutes necessary
to authorize Korea's administrative courts -- at least in
cases related to patents -- to issue injunctive relief.


27. (SBU) In response, a KIPO representative asked for
clarification whether our concern was that injunctive relief
was not available, or that it was not given. When the U.S.
delegation replied that the USG was concerned about both,
the Korean delegate described the Korean patent system as
being the same as in the United States, and asserted that
the Patent Court does have the authority to order injunctive
relief. This is contrary to what Embassy research -- and
that of Korean law firms representing U.S. interests in
patent disputes -- indicates. Both sides undertook to
research the matter further and to raise the issue in
subsequent meetings.

OTHER ISSUES
--------------


28. (SBU) Visas for Nurses: MOFAT Director Lee noted that H1-
B visa quotas and the exclusion of big cities from the H1-C
category create problems for Korean nurses in obtaining
visas to work in the U.S. Lee urged changes in the H1-B and
H1-C requirements, and said that the ROKG would like to see
this issue included in the FTA negotiations. Ki explained
that USTR does not have authority in visa issues and that
only Congress has the authority to make changes in visa
requirements. Embassy staff noted that the Korean Consulate
General in Houston has been working with Congressional
offices in Texas on the visa issue, and urged them to
continue working on this issue through that channel.
Director Lee concluded that the visa issue is a "win-win"
situation for both sides, whereby the U.S. gets qualified
nurses to meet a growing demand and the Korean public would
view such a move in a positive light.


29. (SBU) Diamond Saw Blade Anti-Dumping Investigation:
Director Lee asked that the USG take note that the Korean
government considers our treatment of Korean manufacturers
of diamond saw blades to be unfair, compared to China. Lee
also noted in passing that USG anti-dumping procedures are
onerous for ROK manufacturers, most of which are small or
medium-sized enterprises.

VERSHBOW