[Defense Commentary] The ROK-US Defense Procurement Agreement and Different Defense Industry Sites

[Associate Professor Lee Jung-gon, Department of Defense Acquisition, Graduate School of Industry, Konkuk University] Since the Korea-US Free Trade Agreement (FTA) came into effect 10 years ago this March, research presentations on its achievements have been ongoing. According to the Ministry of Trade, Industry and Energy, the total trade volume between the two countries increased by 66.1% compared to the time of the agreement in 2012, and exports to the US have steadily increased, with Korean products holding a 3.4% share of the US import market. Although the trade balance has fluctuated, it has maintained a surplus trend driven by Korea’s key products such as automobiles and semiconductors.

In the defense sector, the FTA has enabled domestic defense companies to receive tariff refunds and exemptions on imported products, and based on offset trade and industrial cooperation models, new collaborations with overseas defense companies are being developed. Recently, discussions between the government and academia regarding the Korea-US Reciprocal Defense Procurement Agreement (RDP MOU) have heated up again.

In fact, research on the RDP MOU has been conducted in the past by the Korea Defense Research Institute and academia, examining its impacts from various perspectives. Essentially, as the term "Reciprocal" implies, the agreement is based on the principle of reciprocity, aiming to strengthen defense cooperation and revitalize the defense industry by signing a mutual memorandum of understanding. This encourages maximizing efficiency in defense resources and costs and strengthening the security cooperation system, making it a potentially useful agreement. Furthermore, DFARS (Defense Federal Acquisition Regulation Supplement) Part 225 applies to 27 countries designated as "qualifying country sources." Applying the increasingly stringent US procurement laws to final products acquired from these countries is not in the public interest. In other words, exemption from the Buy American Act (BAA) means that products from these countries can be considered on equal footing with US-made products, making the implications of the RDP MOU very significant for us.

However, the voices from the field and the practical importance felt by defense companies still seem distant. First, most domestic small and medium-sized defense companies are not yet aware of the concept and importance of the RDP MOU. Due to a lack of industry promotion and practical job training on the RDP MOU, these small and medium enterprises feel that they currently lack sufficient competitiveness and strategic conditions to consider entering the US market through such agreements.

Second, the typical business model for defense exports to the US has mostly involved producing and supplying parts through offset trade, and in some cases, US companies have invested in Korean defense firms and utilized offset trade and regional strategic resources. Recently, new models such as industrial cooperation quotas and consortiums have been introduced. These create opportunities to actively leverage our defense buying power to carry out various projects with US companies, from production to maintenance. However, with the addition of the RDP MOU, a concrete review is needed to determine what additional value can be created. Also, expanding opportunities for mid-sized and small enterprises and increasing export volumes require listening carefully to voices from the field and finding answers accordingly.

Finally, the ultimate direction we must pursue is to move beyond market entry through parts production to pioneering new markets through international joint development. For this, the technological level and competitiveness of our companies are crucial. According to the 2021 Defense Science and Technology Level Survey published by the Defense Technology Promotion Research Institute, among 16 advanced defense countries, Korea ranked 9th overall, with a technology level of 79 compared to the US baseline of 100. However, this result shows that the technology gap has not been narrowed compared to 81 in 2015 and 80 in 2018. Our challenge will be how our companies overcome this by supplementing technological gaps while allowing fair competition and removing market access barriers pursued by the RDP MOU.

The railway vehicle industry, similar to the defense industry, is a national key industry requiring massive capital and advanced technology. Major countries worldwide protect their markets with standards, environmental regulations, and localization rules tailored to their circumstances, applying exceptions in FTAs (Free Trade Agreements) and GPAs (Government Procurement Agreements), and restrict market opening depending on the scale of their domestic industries. In the defense industry as well, from a long-term perspective, we must carefully review the practical opinions of our companies in the field, objectively evaluate the pros and cons, and calmly prepare for the RDP MOU based on the healthy competitiveness of our companies. There is no need to rush.

This content was produced with the assistance of AI translation services.