Retuning the KORUS FTA

On June 30, President Trump talked trade with newly elected Korean President Moon Jae-in. It didn’t go well. Trump claims the Korea–United States Free Trade Agreement (KORUS FTA), which entered into force in 2012, is a bad deal and needs to be changed; Moon said the existing deal is mutually beneficial. Trump said they were renegotiating KORUS; Moon said they did not agree to do so.

In their Summit communique, both leaders essentially agreed to disagree and didn’t mention renegotiating the KORUS FTA. Given rising tensions on the Korean peninsula amid North Korean missile tests, it made sense to demonstrate that they were faithfully allied. But Trump did not take no for an answer: soon after the Summit, US officials invoked an obscure provision of the KORUS FTA calling for a special meeting of trade ministers within 30 days to discuss amendments to the pact.

The US request was ill-advised and inappropriate—such special meetings are meant primarily to address import surges and other emergencies—and caught the Koreans off guard (and without a trade minister to meet with US Trade Representative Robert Lighthizer). Yet the meeting could still produce constructive results, if the KORUS FTA partners take pragmatic and incremental steps to deepen bilateral trade ties.

Moon clearly does not want to reopen KORUS negotiations since doing so could revive fractious political fights on agriculture and investor-state dispute procedures that previously complicated Korean ratification of the pact. Instead, he wants both sides to study the impact of the KORUS FTA on bilateral trade and investment before considering revisions to the trade deal.

In contrast, Trump already thinks he knows what the KORUS FTA has done. He blames the pact for the increase in the US merchandise trade deficit with Korea since the pact took effect in March 2012 and wants Korea to buy more goods from the United States to improve the US trade balance. He also complains about nontariff barriers (NTBs) protecting Korean auto and steelmakers that disadvantage US companies in both markets. Oddly, he gives short shrift to services or agriculture, sectors where US exporters are highly competitive and could expand sales in Korea.

As I noted last March, Trump’s criticisms are off target. His proposed trade policies will have at best a marginal impact on bilateral trade flows. Regardless of what happens in the US-Korea trade talks, the US bilateral trade deficit with Korea is likely to fall in the near term.

Since the Trump trade team is fixated on bilateral trade balances, contrary to the broad consensus of economics experts, here are the most recent data from Trump’s Commerce Department. In 2016, the United States ran a bilateral deficit on goods and services with Korea of $17.6 billion—with a $27.7 billion deficit on goods trade and a $10.1 billion surplus on services trade (see table below). In contrast, the 2016 US deficit with China was $309 billion, with the European Union $93 billion, with Mexico $63 billion, and with Japan $57 billion (on a balance of payments basis).

So far in 2017 (January through May), US merchandise exports to Korea are up 23 percent (year over year) and US imports from Korea are down 2 percent, so the US bilateral deficit on goods and services is now running at an annual rate of about $12.5 billion (assuming ongoing US services surplus of $10 billion). For all countries, the US trade deficit is running at an annualized rate of $560 billion. Korea thus accounts for only 2.5 percent of the 2017 US deficit in trade in goods and services.

The above numbers show that Trump’s rationale for revising the KORUS FTA is misplaced. But the pact was concluded a decade ago, and subsequent trade deals have revised some provisions and added new areas not included in the original text. Updating the KORUS FTA would be worthwhile. But President Moon correctly notes that negotiations require joint planning, as occurred in an expeditious manner before the KORUS FTA talks began in 2006. So both sides need to moderate their positions. Trump should not threaten to pull out of the KORUS FTA, but Moon should not oppose US demands to renegotiate the existing deal. This suggests a two-stage approach to advancing bilateral trade relations, using the platform of KORUS FTA meetings.

First, use the special session meetings (1) to seek commitments to increase Korean purchases of US goods, especially liquefied natural gas (LNG) and autos and (2) to study where the KORUS FTA needs to be updated.

On LNG, market forces already are prompting a shift in global LNG trade. Low domestic gas prices and new investment in gas pipelines and LNG export terminals are creating new and highly competitive US suppliers for the Korean and other markets. In 2016, Korean imports of LNG 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.

On autos, the KORUS FTA has encouraged rapid growth in US car exports to Korea, albeit from a very low base, since Korean car tariffs were removed in 2016. Sales of US-made cars in the Korean market have increased by almost 90 percent since 2012. But autos and parts still account for a large share of the US trade deficit with Korea because of large US imports; Trump also claims that Korean NTBs restrict US sales in the Korean market.

In fact, US shipments could be constrained in a few years if changes are not made to the KORUS FTA preferential handling procedures for autos—basically an exemption for each US automaker that allows 25,000 US auto imports to enter the Korean market without meeting Korean safety standards. Trump officials regard Korean regulations as NTBs and the special quota is a way to exempt US shipments from that requirement. Increasing the quota would effectively mean that Korea accorded mutual recognition to US standards.

Second, use the KORUS procedures to develop an agenda for augmenting the pact in areas like e-commerce, disciplines on state-owned enterprises, and trade remedies (to address inter alia US concerns about circumvention of antidumping measures on steel products). The KORUS FTA needs updating and Korea should agree to needed reforms. Recall that Korea previously planned to do so by participating in the Trans-Pacific Partnership—a pact that largely was based on the KORUS FTA. Updating KORUS will require US officials to collaborate closely with Congress—a process that should begin before US and Korean trade officials meet in August in special session of the KORUS FTA.