Moon treads gingerly with Korea-U.S. FTA
The Korea-U.S. Free Trade Agreement, which celebrated its fifth anniversary earlier this year, is expected to be one of the most sensitive issues that South Korean President Moon Jae-in will likely face when meeting U.S. President Donald J. Trump in Washington on Friday.
The question is whether Moon can convince Trump to back down from his claims that the pact will be either renegotiated or terminated. In fact, on April 29, his 100th day in office, the U.S. president signed an executive order calling for a review of all existing trade agreements, including the Korus FTA.
“Everything in Nafta is bad. That’s bad. Everything’s bad. But in the case of South Korea we have a deal that was made by Hillary Clinton. It’s a horrible deal,” Trump said during an interview with the Economist last month. “And it’s up for renegotiation, and we’ve informed them that we’ll renegotiate.”
His comments were made even after the U.S. Trade Representative (USTR) in April evaluated the bilateral deal positively on its first annual report under the Trump administration. The USTR report said that the trade agreement with Korea has benefited American business, particularly by allowing small and midsize companies to expand in the Korean market.
“The Agreement has brought improvements in the transparency of Korea’s regulatory system, strengthened intellectual property protection, helped dismantle non-tariff barriers to autos and other key U.S. exports and enhanced market access of U.S. exporters of all sizes,” the report by the U.S. trade agency stated.
It continued, “Korus provides meaningful market access commitments across virtually all major services sectors, including improved access for telecommunications and financial services. The Agreement also has improved Korea’s business environment for U.S. exporters while strengthening and expanding U.S. ties with a key strategic partner in Asia.”
Even U.S. Vice President Mike Pence raised the need to change the bilateral trade agreement during his first visit to Seoul a few days after the USTR report was released.
“Despite the strong economic ties between the United States and South Korea, we have to be honest about where our trade relationship is falling short,” Pence said. “Most concerning is the fact that the United States trade deficit with South Korea has more than doubled since Korus came into effect. That’s the hard truth of it.”
He cited Trump’s pursuit of an “American First” policy, which will be applied to trade relationships, including with Korea.
“We will work with you toward that end as we reform Korus in the days ahead,” Pence said. “The truth is a stronger American economy means a stronger economy for South Korea and for all of our trading partners.”
Since Trump won the election in November on the platform of “Make America Great Again,” the U.S. government has been ratcheting up protectionism measures.
The U.S. consumer electronics company Whirlpool in January won an anti-dumping case against Korean rivals Samsung Electronics and LG Electronics. The U.S. International Trade Commission, after concluding that the Korean companies dumped the price of washing machines manufactured in China, slapped 52.51 percent and 32.12 percent duties on Samsung and LG, respectively.
Korean steel companies are also facing protectionist measures from the U.S. as Trump has questioned whether importing foreign steel could be a national security threat. The U.S. government is currently reviewing steel imports from major trading partners and determining whether they constitute a threat, creating the foundation for trade barriers as the White House argues that steel is important for its national security.
Korea is the third-biggest exporter of steel to the U.S. after Canada and Brazil, accounting for 12 percent.
In the second quarter of this year alone there have been 15 cases where Korean exported goods were faced with limited access in the global market. Five of those cases are from the U.S., with washing machines, steel and solar batteries being targeted.
Interestingly, the U.S. is not an economy that is driven by exports. According to HMC Investment Securities 70 percent of its GDP comes from consumption by Americans, meaning it relies heavily on the domestic economy. The manufacturing industry only accounts for 13 percent while roughly 62 percent comes from the finance and service industries.
Kim Moon-il, an analyst at HMC Investment Securities, said Trump’s stance on Korus is an attempt to deflect the negative press he has received due to the investigation he is facing on Russia’s role in the U.S. presidential election.
“President Trump needs a strong justification to improve the U.S. economy,” Kim said. “In order to overturn the situation that he is faced with, there’s a stronger possibility that he might resort to policies that put America’s interests first, like designating other countries as currency manipulators.”
Kim said while the possibility of Trump being impeached is low, expectations on the U.S. economy have been weakening recently. Due to the domestic political climate in the U.S. several of Trump’s economic policies, including investment expansion, infrastructure renewal and corporate tax cuts, have yet to gain ground.
The FTA renegotiation could also be used by the Trump administration as a way of showing it is putting America’s interests first.
There have been different evaluations of the effect that the bilateral trade agreement has had since 2012.
The Korean government has argued that the FTA has benefited both countries more than people think.
According to the Korea International Trade Association, between 2011 and 2016 Korea’s annual trade volume has shrunk 3.5 percent.
During the same period global trade has fallen 20 percent every year. But over that time bilateral trade between Korea and the U.S. has grown, on average, 1.7 percent to reach nearly $11 billion.
Furthermore, while Korea’s exported goods market share in the U.S. was only able to increase from 2.57 percent to 3.19 percent, a 0.62 percentage point increase, the U.S. has enjoyed a far faster increase in its market share in the Korean market. During the same period, U.S. exported goods’ market share in Korea has increased by 2.15 percentage points, from 8.5 percent to 10.65 percent.
On the contrary, Robert Scott of the U.S.-based Economic Policy Institute last year released a report that argued that the trade deal has resulted in an increasing U.S. trade deficit and more than 95,000 job losses. When the pact was originally made, Obama claimed it would increase jobs by 70,000 and American goods exports by $10 to $11 billion.
“Since exports to Korea were flat in the first four years since Korus took effect, jobs supported by exports were, at best, unchanged in this period [2011-2015],” Scott wrote in the report. “Meanwhile, the rapid growth of Korean imports has eliminated tens of thousands of U.S. jobs.”
Korea’s trade surplus with the U.S. has doubled since the bilateral trade agreement was made from $11.6 billion in 2011 to $23.3 billion in 2016.
Jeffery Schott of the Peterson Institute for International Economics in a May report argued that while the trade deal results do not match expectations, this was not because of problems stemming from the trade deal itself but the unfavorable global market situation.
“The shortcomings of the pact are not a major cause of the tepid growth in the bilateral trade,” Schott said in the report. “Macroeconomic factors and the slow recovery from the global financial crisis have been a major factor.”
As the U.S. is one of Korea’s biggest trading partners, a renegotiation or termination is expected to have a huge impact.
A study by the Korea Economic Research Institute estimated a $17 billion loss in exports would incur if the trade deal made five years ago is revisited. Automakers in particular are predicted to suffer the most, at $10.1 billion, followed by the machinery sector with $5.5 billion and Korean steel industries with $1.2 billion. This would bring about a larger impact on job losses, possibly amounting to 100,000 jobs.
But Korea isn’t the only one that would be suffering if the trade deal is scrapped.
Junseong An, a Maryland lawyer, in an East Asia Foundation publication noted that terminating the deal will have a worse impact on the U.S. than on Korea by weakening the global competitiveness of U.S. goods and putting U.S. companies in a worse state than their European competitors armed with free trade benefits.
“In the case of trade goods, it seems that the trade deficit would actually increase [if the Korus FTA is terminated],” Ahn wrote. “This is because when the FTA ends, the WTO’s most favored nation treatment (MFN) tariff will be applied where South Korea’s average tariff rate is higher than the U.S.
This view is shared by the Korea Institute for Industrial Economics & Trade, which projected that if the bilateral trade agreement is broken the U.S. custom tariffs on Korean goods will be at 1.6 percent, while U.S. companies will have to bear the burden of a minimum 4 percent tariff on goods exported to Korea.
“Also, U.S. companies will have to engage in disadvantageous competition with European companies, which receives tariff benefits through the Korea-EU FTA and the Korea-EFTA FTA,” Ahn added.
The area where the U.S. will likely suffer the most is expected to be in the service industries, which recorded a $9.39 billion surplus in 2015.
The Korean government has been making efforts to reduce the trade imbalance.
According to the Korea International Trade Association, Korea’s trade surplus with the U.S. has shrunk. In the first five months of the year, Korea’s trade surplus amounted to $6.9 billion, which is a 37 percent cut from the $10.9 billion recorded during the same period a year ago. This is thought to be a result of pre-emptive efforts made by the Korean government against pressure from Washington.
South Korean President Moon has also elevated the status of the vice minister in charge of trade negotiations, which has been one of the noticeable changes during the reorganization of the government announced earlier this month. The trade negotiation department was weakened under his predecessor President Park Geun-hye.
While the vice minister will head the trade negotiation department, which will remain under the Ministry of Trade, Industry and Energy, he is given the same status as ministers and allowed to attend cabinet meetings. The move is seen as replicating the access of the head of the USTR, who attends cabinet meetings in the U.S.
Despite concerns, some experts predict the meeting between Moon and Trump on Friday is unlikely to result in a large-scale change to the bilateral trade agreement.
The Korea Trade-Investment Promotion Agency’s Washington office earlier this week released a report speculating that the U.S. government is likely to tone down its insistence on the renegotiation of the trade pact, as it has done with Nafta.
The Kotra report speculated that instead of demanding an overall change on the agreement Washington may opt for updating the pact by asking for new clauses such as including digital trade and banning currency manipulation.
When Robert Lighthizer, the USTR representative, reported to Congress that the U.S. government is entering a renegotiation of Nafta, the USTR changed the wording from renegotiation to modernization.
Lighthizer told U.S. lawmakers during a hearing on June 22, “There are no plans to drop out [from the Korus FTA] of course at this point,” while raising concerns over the deficits as ‘troubling.”
“I’m going right down the line and insisting with these people [South Koreans] that you can’t have barriers to trade and have a $20 billion or $30 billion surplus to us.”
The American Chamber of Commerce in Korea recently proposed Moon announce a $10 billion “Buy American Fund” during his visit in Washington as a move to ease U.S. government pressure.
“It would be extremely effective if President Moon jointly announces with President Donald Trump a $10 billion Buy American Fund,” Jeffery Jones, the former head of Amcham said in a press conference, adding that this would help alleviate the pressure by showing Korea’s commitment to buying American products.
“The meeting between the Korean president and the U.S. president is very important,” said Kim Doo-un, an economist at Hana Financial Investment. “The U.K. and Japan [in February] and China [in April] have been able to achieve their goals through a quick meeting [with President Trump].”
Japan and China were no longer called currency manipulators after the meeting. In the case of Japan, Prime Minister Shinzo Abe promised an investment of $450 billion in the U.S. and promised the creation of 700,000 jobs.
Moon, on the contrary, is visiting the U.S. in a more unfavorable situation. Not only is there tension between Seoul and Washington over the deployment of the U.S. antimissile system, but the recent death of American student Otto Warmbier following a year in captivity in North Korea may cause friction as Moon’s more lenient approach to Pyongyang is expected to conflict with that of Trump.
“Drawing from the experience between the Kim Dae-jung administration and the Bush administration in 2001, a move that is not cautious could result in a negative result,” Kim of Hana Financial Investment said.
BY LEE HO-JEONG [firstname.lastname@example.org]