Don’t shortchange the FTAThe free trade agreement between South Korea and the United States turned five years old this year. The comprehensive trade pact between the two economies has been in the spotlight for many years now. It took five years for the deal to take effect after it was finalized in 2007. Korean society vigorously debated the merits and dangers of the pact. But administrations on both sides of the ideological divide defended it.
While Koreans now take the pact for granted, voices challenging the deal are coming from the U.S. Some in the hawkish administration of President Donald Trump, whose economic and trade policies revolve around his America First campaign slogan, accuse the deal of working more in the favor of South Korea, citing its widened trade surplus with the U.S.
As that hard-line group points out, Korea’s trade surplus with the U.S. increased to $23.2 billion last year from $11.6 billion in 2011. But the FTA cannot be analyzed exclusively through trading in goods. Apart from goods, the trade deal is affected by various factors like the two nations’ economic structures, industrial competitiveness and economic conditions.
The FTA also cannot be fully credited for Korea’s increased surplus in trade with the U.S. In automobiles alone, Korea’s imports of American brands grew faster than its exports of cars the other way. Seoul incrementally removed tariffs on American car imports, while Washington lifted its 2.5 percent levy as late as 2016. Still, Korea’s car exports to the U.S. decreased last year because more automobiles were produced by the U.S. manufacturing bases of Korean automakers.
The imbalance stems more from the difference in the structures of the two economies. The U.S. economy is structured to incur deficits in its current account balance because Americans spend more than they earn. Korea rakes in a surplus because its people tend to save more than their American counterparts. Moreover, Korea compensates for its surplus with the U.S. through direct capital investments or the purchase of U.S. Treasuries.
The two nations’ different economic conditions also contributed to Korea’s surplus. The U.S. economy over the last four years recovered and demand increased, while imports stayed sluggish in Korea because of its growth slowing under 3 percent.
The gap in industrial competitiveness is another factor. Korea is strong in manufacturing while the U.S. is more competitive in services. Korea registers a surplus in trade in goods whereas the U.S does so in the services sector. Since the FTA, Korea’s deficit in services with the U.S. soared to as high as $14.1 billion.
The imbalance in the trade account between the two countries should be understood from the long-term and macro-economic perspectives. If the FTA is blamed for the U.S. trade deficit with Korea, how can Washington explain its larger deficit of more than $60 billion each with Japan and Germany, with whom America does not have free trade arrangements? The argument is also self-contradictory as the U.S. International Trade Commission last year issued a report claiming that the FTA helped the U.S. ease its trade deficit with Korea. It does not make sense to argue otherwise a few months later.
When looking beyond the trade balance, there is plenty of evidence of the benefits the FTA brought to the two countries. While global commerce on average decreased 2 percent annually from 2012, bilateral trade between Korea and the U.S. grew 1.7 percent on average under the FTA. Korea’s share in America’s import market increased to 3.19 percent last year from 2.57 percent before the FTA took effect. The share of American brands in Korea’s import market also climbed to a 10-year high of 10.64 percent in 2016 from 8.50 percent earlier. The arrangement has served the two markets well.
Moreover, Korean companies’ increased investments in the U.S. following the FTA created 10,000 new American jobs.
Tami Overby, senior vice president for Asia at the U.S. Chamber of Commerce, said early this year that the U.S. business sector considers the Korea-U.S. FTA “the gold standard” for striking similar deals with other countries. The deal remains a landmark because it includes a comprehensive and high-level set of standards.
The FTA is a valuable set of trade rules born out of lengthy consultations and discussions. In order to ensure free trade, Washington must regard the Korea-U.S. FTA as a deal for America to follow through on, not as a pact to repeal or replace. We should closely watch the U.S. moves, but need not overreact.
We must keep a balanced view based on accurate data and ensure our valuable economic relationship is not influenced by political factors. Both sides must come to a frank and balanced evaluation of the deal so that the present serve as a new starting point for bilateral cooperation when we review the FTA in hindsight five years later.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, March 29, Page 29
*The author is the head of the Institute of International Trade of the Korea International Trade Association.