Trump, Trade, and South Korea
Catching up on my reading in the aftermath of Donald Trump’s election as President of the United States, I was struck by the sheer number of press interviews with pundits predicting Trump’s policies toward North Korea. I don’t want to speak ill of friends, but much of the commentary seemed to convey excessively authoritative accounts of what President Trump would do. (By comparison, the judicious restraint of my co-conspirator here at Witness to Transformation, Steph Haggard, was an admirable exception.)
Given that Trump has advocated everything from assassinating Kim Jong-un to sitting down with him for a hamburger and a Coke, I think that the most honest response at this juncture is “we really don’t know.” For a variety of reasons, I believe I’m on a little firmer ground when it comes to South Korea, however.
Trump made international trade one of the primary issues of his campaign, and exit polls suggest that trade and immigration were the two most salient issues to his supporters. Moreover, the president has enormous executive authority in the area of trade (see the analysis of my PIIE colleague Gary Hufbauer, whose assessment has been confirmed by other lawyers such as Michael Gadbaw at the Georgetown University Law Center and the international trade law team at Hogan Lovells), so trade policy is an area where President Trump could make an immediate mark without needing to get legislation through the Congress.
During the campaign, Trump and his advisors exhibited an obsession with trade deficits, focusing on six countries with which the US runs bilateral deficits: China, Mexico, Japan, Canada, Germany, and South Korea. In the short-term, the focus is likely to be on China and Mexico on which Trump threatened to impose 45 percent and 35 percent tariffs, respectively. Trump began backing away from those positions in the latter part of the campaign, and in a post-election interview with Yahoo Finance, advisor Wilbur Ross even denied that Trump had even stated that he would apply a 45 percent tariff on China, a claim belied by audio tape released by the New York Times.
China presents an interesting case for the incoming president. Its status as a non-market economy makes it easier for the US to apply protection in the form of anti-dumping and countervailing duty actions. But China has shown no reluctance to retaliate against the US in the past. A recent piece in China’s Global Times practically taunts Trump, reminding him that when President Obama imposed protection on Chinese tires, China retaliated against chicken and auto parts and that was that. Boeing aircraft, iPhones, and soybeans are all listed as possible targets for future retaliation—a list that shows remarkable similarity to the cases that Sherman Robinson, Tyler Moran, and I modeled in a piece assessing Trump’s trade policy proposals released in September. Needless to say, the effects were unpleasant for workers in those sectors or residents of places such as Everett, Washington where aircraft are fabricated, or the belt through Mississippi, Arkansas, Tennessee, and Missouri where soybeans are intensively cultivated.
The real issue is how these tendencies interact with the Trump macro policy mix.
Trump opposes the Trans-Pacific Partnership (TPP), a regional trade pact, which has been concluded but not ratified. South Korea had expressed interest in joining TPP but Trump’s opposition effectively kills it, and the Obama Administration threw in the towel on its efforts to pass the ratification legislation during the Congressional lame duck session.
Among existing agreements, the North American Free Trade Agreement (NAFTA) is clearly Trump’s bete noire, but the Korea-US (KORUS) Free Trade Agreement runs a close second. Trump and his advisors have repeatedly called KORUS a “job-killer” claiming that the agreement destroyed 85,000-100,000 American jobs.
These preferential trade agreements contain provisions for renegotiation and withdrawal, but place a fairly high hurdle on renegotiation, precisely to “lock-in” the agreements and prevent backsliding or goalpost shifting. The president has the power to inform our trade partners of our intention to withdraw with a 180-day notice. The president can even pull the US out of the World Trade Organization, another threat Trump made on the campaign trail. All of this can be done without Congressional oversight.
The US has complaints about Korean implementation of KORUS, particularly in the auto sector, an industry thought to be of particular salience to Trump and his advisors. So it is not hard to imagine the US demanding consultations with the threat of invoking the 180-day notice period, and then exercising that prerogative if Korea was not sufficiently forthcoming in its concessions. If agreement were achieved, it is most likely that it would be structured as a side-agreement or addendum to KORUS rather than a renegotiation of the treaty itself. This would allow the agreement to remain in force and avoid the need to have the whole agreement re-ratified by the US Congress and the Korean National Assembly.
But it should be remembered that two can play this game and this tack is not without risks: Chung Dong-young, the 2007 Minju Party presidential candidate, has reminded the Korean public that the South Korean president could invoke the 180-day withdrawal clause which has evolved into the proverbial threat of South Korea withdrawing from KORUS by sending the White House a fax. Current politics in Seoul are fluid to say the least, but it would be unsurprising if a candidate from the center-left were the next South Korean president. Be careful what you wish for.
Trump trade concerns with South Korea could extend beyond KORUS. Exchange rate manipulation was another recurrent theme of the Trump campaign. As with trade, the primary focus was on China (including Trump’s famous pledge to declare it an exchange rate manipulator his “first day in office”). Korea does not currently meet the criteria for “exchange rate manipulator” embodied in legislation passed last December, but there is some thought that President Trump could reach back to earlier legislation for a more flexible definition. There is some evidence that the Bank of Korea has intervened in currency markets in an asymmetric was to prevent appreciation, and the lack of transparency in Korean exchange rate policy was a major gripe of the Treasury Department under President Obama. So, Korea could come under fire in this dimension as well.
So far this discussion seems relatively benign. The real issue is how these tendencies interact with the Trump macro policy mix, and here is where the problems could escalate quite dramatically. Tax cuts and increased spending, primarily on infrastructure and defense, are likely to generate a significant fiscal stimulus. The results will be a short-term growth spurt, budget deficits, rising interest rates, and an appreciated dollar. What could transpire is a very nasty version of the first Reagan Administration: growing trade deficits lead Reagan to impose trade protection, indeed “more trade protection than any president since Herbert Hoover” in the infamous words of then-Treasury Secretary James Baker at a PIIE event. And Reagan was an ideological free-trader, who had to at least feign reluctance to impose protection. (That was one reason that protection in the Reagan Administration took the form of “voluntary export restraints” undertaken by our partners, rather than straight up tariff protection that we imposed ourselves. It also appears to be a history with which Trump’s advisors are completely unfamiliar.)
Trump has spoken approvingly of trade protection since at least the 1980s, and the composition of his trade team does not signal restraint. So the real issue for South Korea may be less in the first 100 days, than in 2018 or 2019, when the Trump fiscal stimulus kicks in, and his administration reaches for trade protection in a quixotic attempt to deal with growing trade deficits.