‘Do No Harm’ to Korea-U.S. Trade Relations – In Fact, ‘Do Good’

President Trump’s overarching theme is “fair trade,” but fairness resides in the eye of the beholder. U.S. and Korean definitions may well differ. Yet invoking the fairness theme, the Trump administration has two operational goals: seek bilateral trade balance and reciprocity. Trump sees U.S. bilateral trade deficits as prima facie evidence of unfair trade. Trump also believes that the absence of “mirror image reciprocity” furnishes additional evidence of unfair trade–in other words, higher foreign barriers on U.S. exports of a specific product than U.S. barriers on imports of the same product. Applying these tests, Trump tosses the Korea-U.S. Free Trade Agreement (KORUS FTA) into the basket of unfair deals, alongside NAFTA.

But the U.S. trade deficit with Korea is not a result of KORUS FTA. Econometric evidence shows that trade imbalances are not driven by FTAs, but by fiscal balances (the savings versus investment relationship) and the exchange rate. Moreover, mirror image reciprocity does not provide useful guidance as to productive avenues for updating the KORUS FTA. The height of national trade barriers is simply not correlated with the size of a country’s trade surplus or deficit.

The right metrics to assess the success of KORUS FTA are: (1) the expansion in two-way trade in goods and services delivered by the agreement; and (2) the induced expansion in two-way foreign direct investment (FDI). Two-way trade (exports plus imports) in goods and services between Korea and United States increased from $129 billion in 2011 to $145 billion in 2016. Two-way investment (inward plus outward stock) increased from $48 billion in 2011 to $74 billion in 2015. On these metrics, the KORUS FTA is a great success.

Foreign direct investment in the United States by Korean firms had already created about 45,000 jobs by 2014 (based on Korean data). For example, Korean automakers Hyundai and Kia operated their manufacturing plants in Alabama and Georgia with a complement of 6,700 workers in 2015.

U.S. “trade remedies” that limit imports could undermine the benefits of KORUS FTA. Secretary of Commerce Wilbur Ross and U.S. Trade Representative Ambassador Robert Lighthizer have embarked on an agenda of sector-specific actions to limit U.S. imports of softwood lumber, sugar, steel, aluminum, civil aircraft and solar panels, among other products. Trade remedies include anti-dumping duties against products sold in the U.S. at lower than “fair” prices, countervailing duties against products subsidized by foreign governments, safeguards against products that “injure” the import competing U.S. industry, and restrictions on imports that arguably threaten U.S. national security.

Trade actions that limit imports from Korea could affect steel and solar panels, along with other products. According to Chad P. Bown, Senior Fellow at the Peterson Institute for International Economics, Korea could become the number one targeted exporter among U.S. trade partners. Korean exports subject to U.S. trade remedies are estimated to increase from 7.9 percent in 2016 to 12.2 percent in 2017, with Korean solar panels and steel being most affected.

Since 81 percent of Korean steel exports are already covered by anti-dumping  and countervailing duty orders, and since Korea is a military ally, there is no case for subjecting Korean steel exports to further limits on national security grounds under Section 232 of the Trade Act of 1962.

The Trump administration already has its hands full with NAFTA modernization. It makes no sense to re-open the KORUS FTA until NAFTA talks outline the shape of the new U.S. template for trade agreements. That probably won’t happen before 2018. President Moon’s visit to Washington at the end of June 2017 might clarify the timetable for fresh talks and suggest interim steps that could enhance U.S.-Korea commercial relations.

As with NAFTA, the fundamental mantra in U.S.-Korea talks should be “Do no harm.” Indeed, negotiators from both countries should seek to “do good” by dismantling remaining barriers to two-way trade and investment.

 

Gary Hufbauer is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics

Euijin Jung is a Research Analyst at the Peterson Institute for International Economics

 

This article first ran in The Hill on July 19, 2017.

 

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