US-Korea Defense FTA Signed... Which Companies Benefit from Export Advantages?

The T-50A prototype was completed at the end of 2015 and completed its maiden flight in May of last year.

[Asia Economy Yang Nak-gyu, Military Specialist Reporter] With South Korea and the United States signing the Defense Reciprocal Procurement Agreement (RDP), known as the 'Free Trade Agreement (FTA)' in the defense sector, exports of U.S. defense products are expected to accelerate. Immediate attention is focused on Hanwha Defense's next-generation armored vehicle project and Korea Aerospace Industries (KAI)'s advanced trainer export business.

South Korea and the U.S. signed the RDP during a summit meeting. The RDP is a memorandum of understanding signed by the U.S. Department of Defense with allied and friendly countries. The agreement aims to eliminate or ease trade barriers when exporting procurement products between the signatory countries and is referred to as an FTA in the defense sector.

The U.S. Department of Defense applies the 'Buy American Act' in procurement projects. This system requires that more than 55% of the total cost be composed of American-made parts. If the 55% threshold is not met, a surcharge of about 50% is added to the export cost. Notably, the U.S. plans to increase the preferential purchase ratio from 55% to 75% by 2028, making it virtually impossible for countries not party to the RDP to enter the U.S. market competitively on price.

The U.S. has signed RDPs with 28 countries, including the United Kingdom, Australia, Germany, and Japan. According to the Stockholm International Peace Research Institute (SIPRI), Japan signed an MOU with the U.S. in May 2016. Since then, the sales revenue of Japan's top 100 global defense companies increased to $9.88 billion in 2020, up from $8.27 billion in 2015 before the MOU was signed. Similar trends are observed in the UK, Australia, Germany, France, Israel, Poland, and Turkey, which have also signed MOUs with the U.S.

Therefore, the industry evaluates this as an opportunity to expand exports of domestic defense companies to the U.S. market.

A representative export item is Hanwha Defense's U.S. next-generation armored vehicle (OMFV) project. The OMFV project is being promoted to replace more than 3,500 Bradley armored vehicles currently operated by the U.S. Army. It is known that a total of 54 trillion won in funds will be invested in this project. The OMFV project will proceed in earnest starting next month. Hanwha Defense established a U.S. corporation last May and has begun hiring specialized engineers in the U.S.

KAI is also targeting the astronomically large U.S. Navy advanced trainer (UJTS) and Air Force tactical trainer (ATT) projects. The ATT project is unlikely to be limited to a scale of 100 to 400 units. The U.S. Air Force's standard trainer could potentially see sales of 1,000 units plus alpha (α). In addition, following the U.S. Navy advanced trainer project, KAI could dominate the trainer market of allied countries.

Jang Won-jun, a research fellow at the Korea Institute for Industrial Economics & Trade, said, “As strategic competition among major powers such as China and Russia intensifies, the U.S. is expanding the reorganization of defense supply chains with its allies,” adding, “This will help foster the defense industries and technological development of both countries.”

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