More than Just Trade

In the world of trade agreements, there are some household names: the World Trade Organization (WTO), the North American Free Trade Agreement (NAFTA), and (by virtue of intense criticism during the 2016 U.S. presidential campaign) the Trans-Pacific Partnership. The Trump Administration has expressed its desire to alter, renegotiate, and even withdraw from a number of trade deals. Among the agreements potentially on the chopping block is a name many find unfamiliar – KORUS, the Korea-U.S. Free Trade Agreement.

Although the President spoke extensively about trade during his first trip to Asia last fall that included stops in Japan, South Korea, and China, the direction of U.S. economic engagement in the region remains unclear. Even as the President seeks to reassure South Korea of its steady partnership, and deter aggression from the North, the administration has also threatened to tear up the 5-year old trade agreement with one of our oldest and most significant regional allies.

What is “KORUS”

The Korea-U.S. Free Trade Agreement, known by the acronym “KORUS,” is a bilateral trade deal covering nearly $144.6 billion of trade, making it America’s second largest free trade agreement after NAFTA. Negotiations began under President George W. Bush. In 2011, President Obama signed the implementing legislation into law, enabling the agreement to enter into force on March 15, 2012.

The size of the US-Korea trade relationship may come as a surprise to some. Despite having only about one-seventh the population of the United States, South Korea is the United States’ sixth largest trading partner. American and South Korean companies are often global competitors, with Hyundai and Kia facing off against Ford and Dodge for U.S. auto sales, while Apple and Samsung battle for smart phone market share worldwide.

At the same time, U.S.-Korean trade is often complementary. IBM and Qualcomm sell micro-processers to power South Korean electronics. South Korean consumers prefer cuts of meat that U.S. consumers don’t eat, meaning beef exports allow U.S. producers to better utilize “the whole cow.” TradeVistas has written about the surge in U.S. potato exports to feed Korean demand for “honey butter” flavored potato chips, and the burst of “K-Beauty” cosmetics in American drugstores.

Even before the agreement, the United States and South Korea already had a strong trade relationship, but U.S. companies still faced barriers to the South Korea market. South Korea has famously kept its domestic agriculture and industrial goods markets protected. The KORUS aimed at reducing these barriers, with South Korea granting broad duty-free access for agriculture imports and harmonizing technical standards on automobiles and other regulated products, along with imports of 80 percent of U.S. consumer and industrial products receiving duty-free treatment immediately.

How is KORUS Working

The Trump Administration’s objection to KORUS centers largely on the growth in the trade deficit since it went into effect. In the past 5 years, U.S. exports to Korea have grown a modest 3 percent, while imports have grown about 21 percent. For the most part, the growth in imports from South Korea occurred in electronics and automobiles, neither of which had a change in the terms of trade due to KORUS: electronics have been duty-free since 1997, and auto tariffs did not phase out in the first five years of KORUS. Further complicating matters is the fact that South Korea experienced slow GDP growth during those years, which reduced aggregate demand..

However, some criticism of KORUS is justified. Despite provisions aimed at improving market access for U.S. producers, exporters complain about poor implementation that has created barriers for American goods. For example, the South Korean Customs Service (KCS) has been accused of feet dragging and unnecessarily burdensome paperwork requirements for rules of origin verification.

Regardless of the reasons, in July 2017, President Trump officially notified South Korea of the desire to renegotiate KORUS, under a provision that allows for the formation of a joint committee to “make amendments” to deal. The president has threatened to withdraw from the deal outright unless changes are made that would reduce the bilateral trade deficit. Initial meetings in August 2017 between USTR Robert Lighthizer and South Korean counterpart Kim Hyun-chong were heated and yielded no results. Since then, tempers have cooled, and the sides have agreed to hold meetings to discuss issues of implementation.

Commercial Ties Strengthen the US-ROK Alliance

The truth about trade agreements is that they’re almost never just about trade, and KORUS is no exception. Cattle ranchers and equipment makers may benefit from increased exports and U.S. consumers enjoy increasingly affordable flat-screen TVs, but at the heart of the U.S.-Korea trade relationship lies geopolitics, U.S. economic engagement in Asia.

The Republic of Korea is one of America’s oldest treaty allies, dating back to the 1950 U.S.-ROK Mutual Defense Treaty. Because the Korean conflict never really ended, the United States maintains a rotation of roughly 28,500 servicemen and women in support of the South’s armed forces. Facing an antagonistic neighbor to the North with a large military and nuclear aspirations, the United States’ defense commitments have helped keep the — at times uneasy — peace for decades.

However, the alliance faces challenges. As North Korea inches closer to a reliable ballistic missile that could deliver a nuclear warhead on an American city, South Korea watches anxiously for signals of U.S. intentions. The United States extended nuclear deterrent, or so-called “nuclear umbrella,” becomes less credible if the U.S. homeland is threatened. In a twist on the Cold War dilemma, leaders and voters in the South wonder: would the United States really risk Los Angeles to protect Seoul?

Commerce as a Weapon or as a Tool to Keep Peace

The role of China must also be considered. While the United States is South Korea’s second largest trading partner, China is South Korea’s largest thanks to proximity and a burgeoning middle class. To protest the U.S. deployment of Terminal High Altitude Area Defense (THAAD) batteries – an anti-ballistic missile system – in South Korea, China forced supermarkets owned by Korean conglomerate Lotte to close.

China has since relented, and the weapons remain, but as South Korea-China economic relations deepen, the strains on the US-ROK alliance will also grow. South Korean President Moon campaigned on decreasing South Korea’s reliance on the United States and against deploying THAAD, though he has since moderated his policies. In the years to come, South Korea may be faced with a choice between its divergent security and economic benefactors.

The U.S.-Korean economic relationship, including KORUS, supports the security relationship. The choices the administration makes regarding the agreement will have implications beyond trade. Improved implementation of KORUS could leave the two countries stronger then ever. Withdrawal could mean a new crack in the US-ROK alliance, and possibly a geopolitical shift as South Korea draws closer to China. Following the president’s trip to Asia, Seoul will keep a close eye on KORUS talks and hope to “read the tea leaves” for the future of Asia policy under the Trump administration.