TREASURY SECRETARY PAULSON'S MARCH VISIT TO SEOUL

C O N F I D E N T I A L SEOUL 001327 SIPDIS SIPDIS NSC FOR KURT TONG STATE FOR E, EEB, AND EAP/K TREASURY FOR A/S LOWERY, DAS DOHNER, OASIA/HAARSAGER AND POGGI STATE PASS USTR FOR DUSTR BHATIA, CUTLER, AND AUGEROT E.O. 12958: DECL: 05/07/2017 TAGS: ECON EFIN ETRD KN KS PREL EINV PGOV SUBJECT: TREASURY SECRETARY PAULSON'S MARCH VISIT TO SEOUL Classified By: AMB. ALEXANDER VERSHBOW. REASONS 1.4 (b/d) ¶1. (C) SUMMARY. On the eve of the 8th KORUS-FTA round, Treasury Secretary Paulson visited Seoul March 6-7 to meet President Roh Moo-hyun, Deputy Prime Minister Kwon O-kyu, and Trade Minister Kim Hyun-chong. His discussions reaffirmed: (1) high-level support on both sides for keeping the KORUS-FTA negotiations on track for conclusion by the TPA deadline; (2) the need to close the gap on remaining FTA issues such as autos and financial services; (3) the underlying strength of the U.S. and global economies despite recent market volatility; and (4) the resolution of the North Korean Banco Delta Asia (BDA) case as a strong signal of the rule of law in safeguarding the world financial system. President Roh commented that, with hindsight, he believed the BDA case had proven to be an impetus rather than an impediment to progress in the Six Party Talks. END SUMMARY. -------------- PRESIDENT ROH -------------- ¶2. (C) President Roh opened by praising the U.S. Treasury Department for its constructive role in the 1994 Mexico and 1997 Korean financial crises. Secretary Paulson replied that Korea had accelerated economic reform at that time, thereby serving as a model for other countries and showing how to achieve success out of adversity. President Roh agreed, noting the wisdom of then-President Kim Dae-jung in undertaking comprehensive reforms -- with the help of the U.S. and the IMF -- rather than focusing on short-term issues. ¶3. (C) Roh then raised recent turbulence in world equity markets and his concerns about China's policy direction. Secretary Paulson reaffirmed the fundamental strength of the SIPDIS U.S. and global economies, noting it constituted one of the best periods he has witnessed in his business lifetime -- with solid growth, low inflation, and considerable liquidity. Given this foundation, the Secretary said he was not overly concerned about market volatility. Shifting to his next stop, the Secretary added China should speed up its economic reforms and "needs to get where Korea is," by embracing more market-determined policies and, particular, reforming and opening its capital markets. In general, the Chinese need to continue and accelerate the pace of reform. Roh agreed, saying the Chinese should heed the ROK's experience after the 1997 crisis. ¶4. (C) Turning to the KORUS-FTA, Secretary Paulson said Korea clearly understood the benefits of trade in ways that many other Asian countries do not. President Roh said he was doing his best to conclude the FTA. He explained that the FTA will not have as big an impact on the U.S. as it will on the Korean economy. As a result, the Korean public was anxious about the benefits and costs of the FTA. He asked the Secretary for flexibility on the U.S. part to ensure that the final agreement was seen as fair and mutually beneficial. Secretary Paulson responded that no FTA is easy without a long-term view, but he was "cautiously optimistic" that the FTA could be concluded since it enjoyed Presidential support on both sides. ¶5. (C) President Roh replied that, with hindsight, he believed his political position would have been stronger if he had not launched the KORUS-FTA initiative. His own party coalition was critical of the FTA, chiefly because of the time-lag in generating measurable trade benefits. The Secretary thanked President Roh for his strong leadership in SIPDIS supporting the FTA, noting that it will bolster Korea's economic competitiveness. ¶6. (C) Raising the BDA case, President Roh observed it demanded a lot of hard work but he was pleased it was now almost concluded. As a student of the law, Roh recognized the need to respect legal norms; but, as President, he also recognized the need to take political considerations into account in applying the law. The Secretary replied that the resolution of the BDA case would occur shortly, and it would be done in an appropriate way, mindful of the law and the need to safeguard the integrity of the world capital markets. It will be a good signal to those who believe in the rule of law. ¶7. (C) President Roh acknowledged that he had initially considered the BDA case to be an impediment to the Six-Party Talks and had been very frustrated about its impact. But with hindsight, it seems that the BDA case proved to be an impetus to achieving a breakthrough in resolving the North Korean nuclear issue. If BDA had not arisen, the six parties would still be haggling over how to implement the 2005 Joint Statement, the President said. North Korea was so desperate to resolve BDA that it resorted to drastic measures -- but then came back to the table and worked with the United States to settle the nuclear issue. ¶8. (C) Sharing his broader perspective on North Korea, President Roh emphasized that the North has no option but to change and reform. Because it is isolated and lacks information about the outside world, the DPRK makes frequent misjudgments. South Korea, in turn, is striving to serve as "a guide" for North Korea in order to steer it into more constructive channels. The President noted the ROKG has had some evidence for success, particularly at the Kaesong Industrial Complex (KIC),where South Korean businesses were helping North Koreans to understand how a free market operates. President Roh hoped that KIC employment could be expanded twenty-fold in the near future to permit more North Korean workers to learn to behave like normal workers in a market economy. President Roh closed by stressing North Korea was a "life or death" issue for South Korea. It was absolutely necessary to transform North Korea and bring about its peaceful, successful reunification, drawing on the experience of German unification. -------------- DPM KWON O-KYU -------------- ¶9. (C) In a 30-minute meeting with Secretary Paulson, Deputy Prime Minister (and Minister of Finance and Economy) Kwon O-kyu turned immediately to the KORUS-FTA and predicted good results would come out of the ongoing negotiation. He stressed both the U.S. and Korean presidents have voiced strong support for the FTA, and he was therefore optimistic it could be wrapped up by the end of March. As the chair of the Korean inter-agency process overseeing the FTA, he was pushing other ministries to be more flexible, but the U.S. needed to do the same so that the Korean government could show some "saleable" results to the Korean public. ¶10. (C) Secretary Paulson responded that a successful outcome demanded hard work from both sides, since we also faced a tough situation with the U.S. Congress. In particular, more work was needed on Investor-State Dispute (ISD) language and auto issues. Assistant Secretary Lowery added that financial services discussions have made solid progress and should be wrapped up soon, with special attention paid to temporary capital control safeguards. ¶11. (C) DPM Kwon highlighted the resistance of the Korean broadcasting sector to open up fully to foreign investment. Since the Roh government had more difficult relations with the print media than with the broadcast media, it was hard to pressure the Korean Broadcasting Commission to open the market. Ambassador Vershbow and Secretary Paulson urged Kwon to take the long view, since opening up the broadcasting sector was essential to improving its performance and competitiveness. ¶12. (C) DPM Kwon described Korean GDP performance as "pretty good," albeit dropping from 5.0 percent growth in 2006 to a projected 4.5 percent in 2007. He predicted better performance in the second half of 2007 as domestic consumption grows, and this would boost public confidence. Kwon inquired into the strength of the U.S. housing market, implications flowing from recent U.S. sub-prime mortgage difficulties, and the impact of Yen carry trades on the global situation. ¶13. (C) Secretary Paulson affirmed the global economy remained fundamentally strong despite recent market volatility. The U.S. economy was displaying sustainable growth, and a correction in the housing market was underway. Turning to the Yen, the Secretary stressed its value was market determined, and Japanese authorities recognized the importance of keeping their economy growing on a sustained path. He noted that he never commented on the carry trade. Completing a tour d'horizon, Secretary Paulson outlined the key aims of the ongoing Senior Economic Dialogue with China to foster faster and deeper economic reform particularly in its capital markets. -------------- TRADE MINISTER KIM HYUN-CHONG -------------- ¶14. (C) Kim began by explaining he had told his FTA negotiating leads to consider the eighth FTA round to be the last round. Kim was committed to getting the deal done - both for the near-term economic benefits and the longer-term strategic benefits. Secretary Paulson remarked that the KORUS-FTA was a priority for both Presidents, and said he was encouraged that Kim understood that it needed to get done by the deadline. He added that while the negotiations were being led by Ambassador Schwab and USTR, if the agreement were concluded, there would be an effort by the entire Administration to get the agreement through Congress. ¶15. (C) Secretary Paulson explained that while he was following all the FTA issues, he was particularly interested in investor-state dispute settlement (ISD) and capital controls. We knew these had caused difficulties for Korea in the negotiations, but we had managed to work around other countries' concerns in other previous agreements, and believed we could do so here. Kim said he feared there had been some misunderstanding in some parts of the U.S. regarding Korea's wishes regarding ISD: Korea did not want to weaken the ISD provisions but simply to clarify them -- specifically, to clarify that zoning and general tax measures would not be deemed indirect expropriation. But Korea understood the value of ISD (and wanted to have ISD in its future FTAs, especially with China, where there were currently 20,000 Korean investors). As for financial safeguards, this was important to Korea because of the memories of the financial crisis of 1997-98, but Kim thought both sides could find "some way around that problem." ¶16. (C) Kim mentioned that while the recent improvement in U.S.-DPRK relations was good news, it actually made his job as Trade Minister more difficult, since it had prompted the National Assembly to push him harder to persuade the United States to include Kaesong products in the FTA. This was an important issue to the left-wing supporters of the Roh Government. Of the 192 active free trade agreements around the world, 75 recognized the concept of outward processing; if the U.S. and Korea could simply agree to recognize this concept in the KORUS FTA, then the specific issue of including Kaesong products could be subject to an annual review, taking into account the nuclear issue, human rights, labor rights -- without spelling them out, or making a prior judgment, Kim added. Secretary Paulson noted that would involve a broader inter-agency review of how things were going in the Six-Party Process. Until now, he and Treasury had focused principally on resolving the Banco Delta Asia issue. Ambasador Vershbow noted the Kaesong issue was on our radar screen, but it remained to be seen whether the U.S. could reflect any agreement (on a review mechanism) in the text of the FTA. ¶17. (C) Kim then turned to beef. He lamented that the ban on U.S. beef was driving Korean beef prices up and consumption down -- even while two million Korean visitors to the U.S. each year ate U.S. beef safely. Nonetheless, the issue had taken on a life of its own. Kim had just spoken with Deputy Agriculture Minister Min, who said the U.S. was now asking Korea to commit by the end of March to reopening the beef market, in advance of the OIE decision in late May. This would kill the FTA, Kim explained; NGOs would complain that the government was putting trade policy in front of its citizens' health, and the FTA would be dead on arrival in the National Assembly. Korea could not act before the final OIE determination in May -- that would have to be the catalyst. Ambassador Vershbow suggested Korea start its internal processes based on the draft OIE finding, which was already circulating, even if a final decision could not come until May; Kim said Korea needed to go through its internal processes first. Kim added "the issue will be resolved, but the timing isn't on my side here." ¶18. (C) As the meeting concluded, Kim asked if he could have a few minutes one-on-one discussion with Secretary Paulson (with Ambassador as notetaker). Kim explained that autos were shaping up to be a big challenge in the negotiations. The ROKG had told its domestic constituencies that the biggest benefit of the KORUS FTA would be the additional market access for Korea's competitive industrial exports -- and autos was a critical component of that. But the U.S. was only offering to phase out car tariffs in three to five years, and to take 15 years to phase out truck tariffs. This was too long. Kim noted that he had taken the initiative to make Korea's auto tax system fairer to U.S. cars -- an initiative all Korea's regional governments had opposed. On auto standards, he said Korea understood "we have to do that too." But to generate the necessary political support for these changes, Korea needed to receive all its market access in automotive within three years - including for trucks and tires. Kim pointed out that Korea was not the main contributor to America's automotive trade imbalance, and commended President Bush for his bold WTO proposal to zero out all industrial tariffs. Secretary Paulson said Ambassador Schwab had told him that autos would be the make-or-break issue for the KORUS FTA, and he knew she was working hard to try to resolve it. He thanked Kim for presenting his views on the matter. ¶19. (U) This cable has been cleared by the Department of Treasury. VERSHBOW