Oct 2, 2018

“Revised” US-Korea Trade Agreement a Small Step Backwards, but Better Than No Agreement

Daniel Griswold Senior Research Fellow

Somewhat lost among all the front-page news last week was President Trump’s meeting with the president of South Korea in New York to sign a revised version of the US-Korea Free Trade Agreement.

President Trump hailed the changes as representing an entirely new agreement to replace the 2012 pact that he had denounced earlier in his presidency as “a horrible deal” that was destroying America. In fact, according to Bob Woodward’s new book on the Trump presidency, Fear, the president was ready in April 2017 to sign a letter withdrawing the United States from the agreement, but aides managed to quietly snatch it from his desk.

The changes the Trump administration negotiated with South Korea are not major and certainly do not represent anything like a new agreement. Nor are the changes a net positive for the US economy. Instead, they represent an incremental retreat from the original goal of getting as close as politically possible to complete free trade between the two nations.

Among the key revisions was the postponement, by a full 20 years, of the elimination of the US tariff of 25 percent on light truck imports. The original agreement, known as KORUS, committed the United States to eliminating the duty on imports from Korea by 2021. The revisions negotiated by US Trade Representative Robert Lighthizer will extend the phase-out to 2041—an incredible three decades from the time the agreement first went into effect in March 2012.

This will be good for US automakers, protecting them from competition while allowing them to maintain higher prices on one of their more profitable lines of vehicles. But it will be a loss for millions of American families who will be forced to pay higher prices than they would if duties had been reduced to zero as provided for in the original agreement. This is not a victory for the United States, but for a narrow group of producers at the public’s expense.

In a small plus, the revised agreement doubles the number of US vehicles—from 25,000 to 50,000—that South Korea can import each year without meeting its stricter safety standards. This may have little or no impact on actual US auto exports to Korea, however, since US automakers weren’t even meeting the lower cap.

Korea also agreed to relax testing requirements for US exports of gasoline engines for vehicles, to recognize US standards for auto parts, and to expand the amount of “eco-credits” available to help meet fuel economy standards. But none of these changes can be expected to significantly boost US auto exports to Korea. There is simply not the same level of demand in crowded, urbanized Korea for the bigger, less fuel-efficient vehicles made in the United States as there is in the United States for Korean-made passenger cars.

All the hyperbole and brinksmanship around the revised KORUS was entirely unnecessary. The agreement as originally implemented has been a success and did not need replacing or even tweaking. President Trump and his trade team made a big deal out of the expanded bilateral goods deficit with Korea after the agreement went into effect, but that deficit is misleading and tells us nothing about the real impact of the agreement.

It is true that the goods deficit with South Korea fluctuated between $10 billion and $20 billion a year in the decade before KORUS, and has fluctuated between $20 billion and $28 billion since then. But fixation on the goods deficit ignores the value to American consumers and import-using producers of more affordable imports from Korea. It also downplays the fact that US exporters have gained additional access to the Korean market since KORUS was implemented.

Since 2011, the year before KORUS went into effect, the value of US goods exported to Korea has increased by 11 percent. This may not seem too impressive, but it has come at a time of slowing growth for the Korean economy and an actual decline in the value of total imports to Korea. As a result, since the enactment of KORUS, the United States has expanded its share of the Korean import market for goods from 9 to 11 percent, according to the UN’s Comtrade Database. This expansion reversed years of declining US market share. The US export sectors enjoying the largest gains under KORUS have been industrial machines, civilian aircraft, engines, equipment, and parts, new and used passenger cars, and meat and poultry.

Meanwhile, service exports to Korea have jumped 44 percent since 2011, while the imports of services from Korea have grown much more slowly. If we combine goods and services together, the overall bilateral trade deficit with South Korea in 2017 was $9.8 billion, up by $3.5 billion since before KORUS (an insignificant increase in the context of an almost $20 trillion US economy). Even by the president’s own faulty scorecard, the goods and services trade balance with South Korea has been a non-issue from the beginning.

The real victory in the revised KORUS is that the outcome could have been much worse. Scrapping the agreement entirely would have deprived producers and consumers in both countries of the benefits of more open competition and the freer flow of goods and services. The Trump administration has taken an agreement that was 95 percent good and turned it into one that is more like 90 percent good. In the current trade climate that the administration itself has created, that is truly something of a victory.

Photo credit: YONHAP/EPA-EFE/Shutterstock

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