Preaching to the KORUS: Another Deal, Another Threat

As President Trump threatened to pull out of the Korea-US Free Trade Agreement (KORUS) earlier this month, it is worth examining the deal, its impacts, and what would happen if the US ended it. 

The KORUS

The Korea-US Free Trade Agreement is the largest FTA negotiated by the US since NAFTA. Originally negotiated under Bush in 2007, the final agreement was renegotiated under Obama in 2010 and went into effect in early 2012. The deal removed tariffs on 95% of goods traded between the two countries over a five year period.

KORUS’ Effect

Since 2011, the US trade deficit in goods with South Korea has more than doubled. Between 2011 and 2016, US goods exported to Korea fell by $3 billion, contrary to what the Obama Administration predicted would be a $10 billion increase. Yet this cannot be blamed on the FTA: all Korean imports declined during this period, so it is likely that without the deal, imports from the US would have declined further. The total US goods and services deficit with South Korea was $17 billion in 2016. Meanwhile, US services exported to Korea have increased 30% and Korean investments in the US more than doubled.

President Trump has focused on the goods deficit (primarily the amount relating to manufacturing), pointed to non-tariff barriers he believes are protecting Korean auto and steel producers, and stressed that Korea needs to buy more manufactured goods from the US. Yet he has overlooked services and agriculture, areas where the United States is particularly competitive. For instance, the FTA made Korea the second-largest market for US beef.

Stay In, Pull Out, Renegotiate?

Overall, US trade with South Korea is a marginal factor is America’s overall trade deficit: “the 2016 US deficit with China was $309 billion, with the European Union $93 billion, with Mexico $63 billion, and with Japan $57 billion.” Trying to address the overall US deficit by going after KORUS makes little sense. Moreover, the Korea’s strong trade in goods stems more from a weak won than the details of the FTA. Since the 2008 financial crisis weakened the won, the Korean government has consistently intervened to keep the won weak, which encourages Korean exports. Political tensions on the Korean Peninsula, with sharpening rhetoric between Kim Jong Un and Donald Trump actually helps keep the won weak, further encouraging exports.

Diplomatically, since those tensions are rising, now would be a bad time for the US to push a renegotiation, or worse, a full withdrawal. The US needs South Korean cooperation to properly address North Korea’s litany of issues, not just its nuclear threat. Angering the South’s government by forcing a painful renegotiation (which the South does not believe will actually solve the problems America claims it wants solved) would strain the relation and make it politically more difficult for the South Korean government to cooperate with the US. Erratic behavior by the US could also push South Korea closer to China, which would damage the US’ ability to hedge against China in the long-term.

Economically, KORUS has actually helped to serve as a floor on US exports, ensuring that US exports do not continuously drop as exports from other parts of the world have. Leaving KORUS would seriously imperil trade: Korea “is the United States’ 6th largest trading partner in goods, sending the United States vehicles, machinery and pharmaceuticals, while importing U.S. agricultural goods, machinery, aircraft, optical and medical instruments, and vehicles. The United States also ran a $10bn services surplus with S. Korea in 2016.”

Overall, KORUS has benefited the US and South Korea. While the deal can certainly be updated, the rhetoric from the Trump Administration speaks more of a complete overhaul. The economic and political effects of such rhetoric, let alone any actual full renegotiation process, currently outweigh the potential benefits.

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