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The future of the Korus

Trump is being pulled back to a more moderate ― and modest ― set of objectives.
July 22,2017
The Korea-U.S. Free Trade Agreement has had a tumultuous history in both Korea and the United States, reflecting growing unease with economic openness in both countries. Yet at the same time, the Korus also reflects shared strategic and economic interests. Despite President Donald Trump’s bluster, early signs suggest that the Korus is not likely to change dramatically.

It is worthwhile remembering the rocky road to the treaty, and the tremendous political difficulties it faced — and survived — along the way. In the United States, the Korus was negotiated under former President George Bush and signed in 2007. However, it took the events of 2010 — the Cheonan and shelling of Yeongpyeong-do — and a bilateral summit to get former President Barack Obama to reconsider his early indifference and generate bipartisan support for the agreement.

In Korea, the path was even rockier. A free trade agreement was hardly at the top of former President Roh Moo-hyun’s agenda, yet was seen as a way of mending fences in a difficult phase of the bilateral relationship. Former President Lee Myung-bak had to navigate candlelight marches against beef imports and fistfights in the National Assembly before the deal was concluded in 2012.

Politics is once again in command. During his campaign, Trump promised to “rip it up,” calling it a “job killer.” In an otherwise friendly and successful summit with incoming Moon, Trump behaved badly by whining about the bilateral deficit.

But it now appears that, as with so many other issues, Trump is being pulled back to a more moderate — and modest — set of objectives.

In contrast to the Nafta and some misleading press coverage, the United States has not sought the “renegotiation” of the Korus. Rather it has invoked a feature of the FTA that convenes a joint committee to discuss implementation with an eye toward reducing the bilateral deficit.

However, the administration’s focus on U.S. trade deficits is confusing and it is not clear how it will be addressed. To be sure, bilateral deficits have nearly doubled during the five short years of the agreement and deficits do constitute a drag on U.S. employment.

Yet deficits are not the result of trade agreements but of larger economic forces. If the United States is importing more than it is exporting, the deficit will be financed by capital inflows, for example in the form of purchases of U.S. securities and foreign direct investment.

This does not mean that tinkering with trade agreements will reduce either the overall deficit or even the deficits with particular countries. That will also depend on the U.S. imports of capital from the rest of the world.

Moreover, Trump’s objectives are in obvious conflict. On the one hand, he claims that he wants to reduce deficits. On the other hand, as deal-maker in chief, he is trying to get foreign trade partners to invest more in the United States. It is a little known fact that Korea currently has a larger stock of foreign direct investment in the United States than the United States does in Korea, employing tens of thousands of American workers. Increasing such capital inflows would be good for the American economy, but would also in theory increase trade deficits.

The involvement of Congress may also prove a benefit for Korea. Congress is often considered a protectionist force in American politics. But in a bipartisan letter to the administration, Congressional leaders from both parties raised a number of issues that will limit Trump’s freedom of maneuver. First, their letter led with a strong reminder of the overall strategic setting. “Preserving and strengthening the strong economic relationship between the United States and South Korea,” they wrote, “is particularly important today with rising tensions on the Korean peninsula.”

Moreover, business interests in the United States are likely to weigh in. Despite the bold talk about renegotiating Nafta, the long outline of U.S. objectives on the North American agreement starts with a commitment to preserve the gains for both industrial and agricultural exporters. It is hard to figure out how the U.S. could impose new restrictions on Nafta or Korus trade without triggering retaliatory measures on the part of U.S. trading partners.

In a recent interview, a prominent official associated with U.S. agricultural exports summarizes the political dilemma facing the administration. When asked how Nafta might be improved, he pointed out that U.S. exporters currently enjoy tariff-free access to the Mexican and Canadian markets. It is not clear how you can improve on zero tariffs. The Congressional letter signaled strongly that the president does not have the authority to tamper with the Korus at his discretion, and will need to involve Congress closely in any discussions.

This assessment does not rule out some difficult negotiations going forward. The Korus negotiation is not the only trade challenge Korea faces. For example, the United States is pursuing enforcement actions with respect to steel trade. Yet even those actions are facing pushback. Many of the issues in question are relatively technical and administrative, like customs procedures, regulatory issues, and tussles in the service sector including data services and storage. The Korus debate is looking like an issue for the negotiators rather than the grand rupture that Trump promised. With careful thought, the Moon administration might even be able to use the negotiations to advance aspects of a reformist agenda.

JoongAng Ilbo, July 21, Page 29

*The author is the Krause Distinguished Professor at the Graduate School of Global Policy and Strategy at the University of California in San Diego. He is the author with Marcus Noland of the Witness to Transformation blog at https://piie.com/blogs/north-korea-witness-transformation.

Stephan Haggard