Fixing the KORUS FTA—Without Fireworks

Despite President Donald Trump’s denunciation of the Korea-US Free Trade Agreement (KORUS FTA) as a “horrible” deal for the United States, there were few fireworks when US and Korean officials sat down to renegotiate the accord on January 5. Unlike the situation with the North American Free Trade Agreement (NAFTA), neither country wants to revisit the entire agreement. Instead, the US and Korean goals are to revise specific commitments using existing amendment procedures of the KORUS FTA. On the other hand, the two sides are far apart on what should be done and what should be discussed, so agreement is far from certain.

President Trump has threatened to scrap the pact if negotiators don’t rebalance the deal and reduce the US trade deficit with Korea. US officials have asserted that the large US merchandise trade deficit with Korea is ipso facto evidence that the agreement has been unfair to the United States. Accordingly, American negotiators are insisting that the agreement enable the United States to export more to Korea. Korean officials disagree but have grudgingly agreed to negotiate amendments to the KORUS FTA.

A quick look at the most recent trade data indicates that US concerns about the bilateral deficit are exaggerated. US trade with Korea is substantially in balance with the notable exception of the auto sector. The overall US trade deficit, goods and services, is less than $12 billion and sharply down from the 2016 level (see table 1). In 2017, US goods exports rose 15 percent and the merchandise deficit fell by 21 percent compared to 2016. The major imbalance is the bilateral deficit in autos and parts, which dropped $2 billion but still recorded a sectoral deficit of $21.5 billion—equal to about 98 percent of the US goods deficit with Korea (see table 2).

The US side clearly expects Korea to make most of the changes and does not intend to amend provisions that require changes in US law. That’s why US officials have not followed the notification, consultation, and reporting requirements necessary to qualify for expedited handling of implementing legislation for the revised agreement under Trade Promotion Authority (TPA).

Apart from wanting to reverse the merchandise trade deficit, what US negotiators want to fix in the KORUS talks is not clear. US objectives have not been vetted publicly or discussed with congressionally mandated advisory groups. The statement issued by both sides after the initial January 5 negotiating session noted that the “United States discussed proposals to move towards fair and reciprocal trade in key industrial goods sectors, such as autos and auto parts as well as to resolve additional cross-cutting and sector-specific barriers impacting US exports.” But balanced trade in the auto sector is a pipe dream: The US auto market is more than 10 times larger than the Korean market. If sales of US cars in Korea equaled the number of Korean-brand cars sold in the US market (imports and Korean cars produced in the United States), US automakers would command a market share in Korea of almost 100 percent!

Nonetheless, US negotiators may try to reduce the sizable bilateral auto trade deficit by drawing on proposals recently submitted in the NAFTA renegotiation. Specifically, they may demand more restrictive rules of origin in autos and parts to encourage Korean carmakers to shift sourcing of cars sold in the US market from Korea to US-based assembly plants (deepening a trend of the past decade in which more than 50 percent of new Hyundai and Kia cars sold in the US market now are made in the USA—up from one third in 2007). They also could ask Korea to expand the quota of US cars that can be imported into Korea—currently 25,000 vehicles per US automaker—based on US rather than Korean standards.

US officials also may press for resolution of problems cited in the 2017 US National Trade Estimate Report on Foreign Trade Barriers, particularly data localization requirements. US officials argue that Korean law imposes stringent requirements on service providers seeking to transfer customer data outside Korea, and favors domestic cloud computing providers to the detriment of foreign service providers. In addition, US officials seem intent on further reductions in Korea’s import restrictions on farm products.[1]

At the first special session of KORUS trade ministers in August 2017, US Trade Representative Robert Lighthizer asked Korea to accelerate and deepen its FTA commitments to farm liberalization. Unlike autos and data services, however, efforts to liberalize Korean farm products beyond the notable commitments made in the KORUS FTA would provoke a strong political backlash in the National Assembly, especially if the US side demanded even a partial opening of the Korean rice market.

Korean officials have been pragmatic in response to US demands for additional Korean concessions without complementary US reforms. Recognizing that US officials can only address requests for KORUS FTA revisions that do not require congressional approval, Korean officials are considering amendments in two rulemaking areas: the investor-state dispute settlement (ISDS) provisions and partner-country exemption from global safeguard measures.

The ISDS procedures allow foreign investors to challenge unjustified direct or indirect expropriation of their investments when governments change law or regulatory practice. ISDS provisions have elicited strong opposition among legislators and civil society groups in the United States, Europe, and Korea, concerned that potential ISDS litigation could discourage regulatory reforms. ISDS provisions were a key concern of Korean critics of the KORUS FTA, though the opposition did not derail ratification of the trade pact by the National Assembly. The Koreans probably would be cheered at home if ISDS was dropped from the KORUS FTA—and US officials might accommodate them. In the NAFTA talks, the US side reportedly proposed changes to ISDS provisions that effectively would eliminate recourse to such litigation. Korean negotiators thus may be pushing on an open door.

Existing trade rules governing what are called “global safeguards” provide temporary protection if imports cause or threaten serious injury to domestic industry. Under WTO rules, safeguard measures are supposed to apply to all imports, though NAFTA exempted regional partners from Canadian, Mexican, and US safeguard measures. The KORUS FTA did not include a similar provision, and the Koreans want to add the NAFTA safeguards exemption to the KORUS FTA to preclude actions like the US safeguards measures applied in late January 2018 against Korean exports of washers and solar panels. Meanwhile, US officials are trying to delete that provision as part of the NAFTA overhaul, so they are not likely to be willing to add it to the KORUS FTA.

Finally, Korean officials hope that planned purchases of military hardware and liquefied natural gas (LNG) will swell US exports and demonstrate their willingness to boost trade opportunities for US exporters. In 2016, LNG imports were valued at $12 billion, so shifting to US suppliers for even 10 percent of their import needs would boost US exports by more than $1 billion.

At a time of turbulence and animosity over trade issues across the board, what are the prospects for the Trump administration achieving a deal with Korea? Trump wants Korea to buy more US goods to reduce the US bilateral trade deficit but won’t offer to change US policies in return for new Korean trade reforms. But Koreans did buy more goods last year and are interested in buying more US energy products. And the bilateral US trade deficit is sharply down from peak levels in 2016—the market already has done much of what Trump wants to rebalance bilateral trade flows. US negotiators should recognize this progress and focus on updating KORUS FTA provisions that encourage more trade and investment between the two countries. Hopefully negotiators on both sides will keep this in mind in round two of the trade talks, starting on January 31.

Note

1. Almost all US farm lobbies strongly supported the KORUS FTA, even though some protection was maintained via Korean tariff rate quotas, and the pact exempted rice from trade reforms.