The US election and US-Korea Trade Relations

Good afternoon. I have been working closely on US-Korea trade relations for the past quarter century since Han Duck-soo asked me to assess the benefits and challenges of moving forward with a bilateral free trade agreement (FTA). After a lot of hard work and patience on both sides, this work supported the negotiation and implementation of the Korea-US FTA or KORUS.

KORUS has strengthened the deep ties that bind our two countries together. But trade problems still challenge us and loom large in the coming year as US trade policy bends to domestic political and economic pressures.

Let me start with the main conclusions:

1. US trade policy will get worse, that is more protectionist, regardless of who wins the presidential election in November; and
2. KORUS will not protect Korean firms from new or augmented protectionist measures and may itself be targeted if Trump returns to power.

Biden and Trump are polar opposites in almost every respect (policy, upbringing, ethics, morality) except trade policy, where Biden has continued most of Trump’s trade restrictions. Much of the overlap is due to the ongoing trade and investment war with China—one of the only issues in US politics to command bipartisan support.

Therefore, one can predict with high probability that US policy in 2025 will:

1. Continue to resort to national security restrictions on steel and aluminum, and likely impose new controls on products and services with embedded chips like cars, port cranes, and Tiktok;
2. Impose more intrusive regulations on outbound US foreign direct investment (FDI);
3. Tighten rules of origin for autos, especially EVs—meaning that US officials will demand revisions to USMCA and KORUS to further limit third-country components in auto production; and
4. Continue to neglect or offer only lackluster support for the world trading system and WTO.

The major area of divergence starting in 2025 would be Trump’s new tariffs on friend and foe alike. Trump’s trade advisor and likely Cabinet member, Robert Lighthizer, has championed Trump’s call for new “across-the-board” tariffs of at least 10%, and likely much higher (50-60% additional tariffs) on top of the current trade war tariffs applied to goods imported from China.

Would Trump have the authority to do that without Congressional approval? The answer is “yes”, if he justifies the measures on national security grounds and declares an international economic emergency under the International Emergency Economic Powers Act of 1977.

Trump also would push to withdraw most-favored nation (MFN) tariff treatment from China, which would trigger retaliatory measures by China that clearly would have adverse consequences for Korean trade and investment throughout the Asia-Pacific region. [Note that Trump’s original trade war tariffs violated US MFN obligations, as did China’s retaliation against US goods, so such a legal step revoking MFN would be largely redundant in terms of trade impact… except for the additional disruptions that would result from potential further Chinese retaliation].

Would Trump also walk away from the Indo-Pacific Economic Framework for Prosperity or IPEF like he did from the Trans-Pacific Partnership (TPP) in 2017? There is less at stake this time, since IPEF is mostly consultative and its trade pillar unfinished. But since it is a Biden initiative, Trump could well shunt it aside and label it a Biden failure.

For his part, a re-elected President Biden is more likely to limit additional tariff increases to the auto sector with the aim of encouraging investment in US-based production, as Kia and Hyundai have been doing for the past decade. New tariffs would try to block Chinese competition, including EVs produced by Chinese companies in Mexico and other countries and then shipped to the US market.

Biden also would support a regulatory backlash against big Information Technology companies, and a more restrictive policy on E-commerce regarding access to data and cross-border data flows. So don’t look to USMCA or the US-Japan digital trade pact as a template for policy reforms that would expand digital trade; US officials already are backtracking from their previous positions on how to liberalize digital trade.

Let me conclude with a less obvious but perhaps more consequential development in 2025 that will affect US-Korean economic relations:

In 2025, the expiration of Trump’s earlier tax cuts will touch off a virtual civil war between Republicans and Democrats in Congress, regardless of who is in the White House. Extending all the cuts is not feasible under any rational economic policy because it would increase the national debt so much.

Trump will defend the cuts as his signature achievement; Biden will counter the tax cuts favor the rich and bleed the Treasury and should be heavily pared back. Republicans would like to save as much of the cuts as possible and cut instead social programs and Inflation Reduction Act subsidies. Democrats favor just the opposite.

The key takeaway is that, for different reasons, each side will look to raise new revenues to fund their political priorities. Since Republicans don’t want to increase income taxes and Democrats don’t want to cut spending on domestic programs, both will seek new sources of revenue, preferably from non-voters… that is, foreigners!

Europe already has started down this road and instituted carbon border adjustment measures (CBAMs) to help fund the green transition by taxing carbon-intensive imports. Trump or Biden will also support CBAMs, US-style, to raise revenues (and thus avoid rolling back some of Trump’s 2017 tax cuts) and/or protect the environment. Climate legislation is already being prepared for action in the next Congress, hitting steel and many other goods with substantial imbedded-carbon emissions (including the electricity used to produce the goods). EU levies will start being collected in 2026.

The proposed US measures would differ from the European CBAM, but the political intent is clear: EU and US measures would impose a hefty tax on imports. And Korean exporters will not be spared because of KORUS or the Korea-EU FTA.

US-Korean trade relations are going to go through a rough patch in the coming year. Don’t say I didn’t warn you.

Thank you.