The Revised US-South Korea FTA: Towards Fairer Trade?
Trump and Moon signed the revised KORUS FTA (Getty Images).
By Min-Hua Chiang

The Revised US-South Korea FTA: Towards Fairer Trade?

Jan. 17, 2019  |     |  0 comments

The revised Free Trade Agreement between the United States of America and the Republic of Korea, known as the KORUS FTA, has been in effect since January 1, 2019. Both countries reached a new consensus on tariff reductions, trade remedies, and limited quotas for Korean steel exports to the US. In addition, some minor changes were made to the dispute settlement clause. The two countries also agreed to improve the transparency of anti-dumping and countervailing duty proceedings. Washington expects the new FTA will widen opportunities for American exporters in automobiles, agricultural and pharmaceutical products. Seoul hopes the new deal will reduce uncertainty and enhance the stability of bilateral trade and investment relations.

Overview of the Bumpy Negotiation Process

The KORUS FTA was brought to the table as early as in the mid-1980s. It was not until 2004 that the two sides reached a consensus on initiating bilateral FTA negotiations. The bilateral trade deal was officially signed in Seoul on June 30, 2007. It soon encountered setbacks in the parliaments of the two countries and it took almost five years for the agreement to be put into force eventually.

During the bilateral trade negotiations, the two most contentious issues were the agriculture and automobile industries. The Korean public protested the unsafe US beef quarantine standards. In the US, criticism was leveled at South Korea’s trade barriers on the automobile trade. Domestic political disputes between the ruling and opposition parties further complicated the ratification process. In the final stage of the negotiations, the US achieved its major negotiating goals in having greater access to the Korean market for its agricultural products, automobiles and services. South Korea managed to exclude rice and the gradual removal of US tariffs on light trucks in this trade deal. The KORUS FTA was officially implemented on March 15, 2012.

The KORUS FTA caught international attention again when President Donald Trump during the US presidential election in November 2016 labeled this agreement a “job killing deal” and a “disaster” for the US economy. In the official report issued by the US Trade Representative (USTR) on March 1, 2017, the KORUS FTA, along with the North American Free Trade Agreement (NAFTA) and China’s joining the World Trade Organization (WTO), were considered to be factors in the rapid rise of the US trade deficit in recent years. As such, the report stressed on the need for reconsideration of the KORUS FTA.

Automobiles are most noticeable item in the revised trade deal. The new deal allows the US to continue to impose a 25 percent tariff on pickup truck imports from South Korea for an additional 20 years, instead of three years under the previous trade deal. South Korea, on the other hand, would have to increase its annual cap for cars that meet the US safety standards to 50,000 per manufacturer from 25,000. In addition to automobiles, South Korea made a number of concessions to the US on steel and aluminum. Meanwhile, the new agreement eases rules on Korea’s textile exports to the US.

Assessment of the KORUS FTA

Before the KORUS FTA took effect, the US International Trade Commission (USITC) had estimated a slight increase of 0.1 percent in the US GDP from the tariff cut whereas the Korea Institute for International Economic Policy’s estimates for Korea’s GDP growth ranged between 0.33 percent and 2.98 percent based on different models. The two countries’ economic performance deviated from these predictions. Weak external demand, the depreciation of the Japanese yen, and growing competition from other regional peers had resulted in a slowdown of Korea export-oriented economy from 6.4 percent in 2010 to 3.8 percent in 2011 and 2.7 percent in 2018. In contrast, the US economy has been gradually recovering from the deep recession of the global financial crisis with an average economic growth rate of 2.3 percent during 2012-2018, from 1.6 percent in 2011.

Figure 1. US trade balance in goods and services with S. Korea 2007-17 (Unit: USD Billion)

Source: CEIC.

According to the USITC, US merchandise exports to Korea were expected to rise more than US imports from Korea. Since the trade deal took effect however, the annual growth rate of US exports to South Korea has fallen behind its imports from the country. As a result, the US merchandise trade deficit has worsened from USD 13 billion in 2011 to USD  28 billion in 2015 and 2016 and USD 23 billion in 2017 (Figure 1). In particular, automobiles remained the main source of the US trade deficit with South Korea after the FTA took effect. Beyond the tariff cut, its decent economic growth and larger population might have allowed the US to import more goods from South Korea. On the other hand, South Korea’s relatively sluggish economy in recent years may have restrained Korean consumption of US goods. The high household debt was also a dampener on Korean consumers’ purchasing capacity.

US service exports are estimated to increase as a result of the FTA, especially in financial, telecommunications, professional and audiovisual services based on the USITC’s assessments. Official statistics showed that the US service trade surplus with South Korea enlarged from USD 7 billion in 2011 to USD 13 billion in 2017 (Figure 1). Travel services was the US’ largest source of service trade surplus with South Korea at USD 8.7 billion in 2017, followed by “charges for the use of intellectual property” at USD 5.7 billion. The trade surplus in travel services reflects greater Korean tourist expenditures in the US than vice versa after the KORUS FTA took effect. The growing surplus in “charges for the use of intellectual property” shows that the bilateral FTA allows the US to take advantage of its technological superiority over South Korea.

Figure 2. The US inward and outward investment in S. Korea 2007-17 (Unit: USD Billion)

Source: CEIC.

The improved regulatory environment and intellectual property rights (IPR) through the KORUS FTA is supposed to attract more American investment to South Korea since the US investment environment has been relatively more liberal and transparent than South Korea’s. After the implementation of the KORUS FTA however, Korean investment in the US has had more dramatic growth than American investment in South Korea. US investment in South Korea progressed from USD 1.8 billion in in 2012 to USD 4.8 billion in 2014. It slowed down from USD 1.7 billion in 2017. The bigger surprise came from South Korean investment in America, surging from USD 4.8 billion in 2011 to USD 10.4 billion in 2017 (Figure 2).

US investments in South Korea were chiefly in the manufacturing and financial sectors. On the other hand, Korean investment in the US is mostly in the wholesale trade and manufacturing sectors. America’s huge consumption market has contributed to Korean investors’ interest in wholesale trade in the US, as well as its productive and highly educated labor in professional, scientific and technical services and the manufacturing sectors. The low interest rate in the US and Korean investment diversification strategy are also reasons behind Korean investments in real estate. The greater investment from South Korea to the US suggests Korea’s greater contribution to the US economy than vice-versa.

The KORUS FTA in the Regional Context

The KORUS FTA can be regarded as part of the US’ initiative to strengthen the US-Asia strategic alliance which had been launched under the Obama administration during its Pivot to Asia policy against China’s increasing influence. In 2011, the strategic rebalancing policy to then Asia-Pacific was announced by the US, one year before the KORUS FTA took effect. Nevertheless, the US approach to counterbalance China’s potential power expansion through the Trans-Pacific Partnership (TPP) changed after President Trump took office in January 2017. The Trump administration withdrew the US from TPP and seeks to replace the multilateral approach with engagement or revision of its bilateral agreements with its trading partners.

The revised KORUS FTA has set the new “rules of game” for other Asian countries — notably China and Japan — to follow suit. The US has tried to correct China’s unfair trade practices by launching trade retaliation. Although Japan is not one of the targeted countries for trade retaliation, Trump has made clear that he is unhappy with Japan’s trade surplus with the US, which mostly comes from automobile exports. Trump is actively promoting more US exports and inward investment to the country. If his policy works, it will have a significant impact on many developing countries which still rely on the US for export-oriented economic growth. It remains to be seen how the bilateral trade deals between the US and other countries will change the US-Asia economic interdependence (Asia manufactured and the US consumed) which has developed since the Cold War era.

On the other hand, the US withdrawal from TPP has put pressure on other regional economic agreements such as the China-Japan-Korea FTA and the Regional Comprehensive Economic Partnership (RCEP) to go broader and deeper. On December 30, 2018, the Comprehensive and Progressive Trans-Pacific Partnership Agreement entered into force for six countries, including Canada, Japan, Mexico, New Zealand, Australia, and Singapore. The regional FTAs are expected to facilitate exchanges of industrial goods, thus strengthening the regional production network. This will attract more foreign manufacturers to the region. As none of these Asian countries are important consumption markets, those manufactured goods, produced with greater production efficiency, are likely to flow to the US.

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