Sav­ing KORUS from Trump

Global Asia - - CONTENTS - By Byung-il Choi

how the rene­go­ti­a­tion of the usko­rea free-trade deal has left so many in south Korea un­cer­tain about Trump’s ap­proach to trade — and us al­lies.

Nowhere have the im­pli­ca­tions of Don­ald Trump’s pres­i­dency on US re­la­tions with al­lies been more fraught than in South Korea. De­spite the im­per­a­tives of the North Korean nu­clear cri­sis in 2017 and early 2018, the new US ad­min­is­tra­tion pressed Seoul hard to rene­go­ti­ate their free trade agree­ment — even threat­en­ing to scrap the deal in the midst of the nu­clear cri­sis. That left the ad­min­is­tra­tion of Pres­i­dent Moon Jae-in to en­gage in an ex­tremely del­i­cate balancing act. Byung-il Choi out­lines how the talks un­folded and why the out­come has left so many in South Korea un­cer­tain about Trump’s ap­proach to trade — and to Wash­ing­ton’s al­lies.

DE­SPITE The STRONG trade head­winds com­ing from us Pres­i­dent Don­ald Trump, some­how the Korea-us Free Trade agree­ment (KORUS) seems to have sur­vived. In late March 2018, seoul and Wash­ing­ton an­nounced that they had reached an agree­ment in prin­ci­ple to amend the deal but the cost of sav­ing it from the un­con­ven­tional Trump was not small. In fact, the deal is not yet com­plete — not be­cause of le­gal scrub­bing, a rou­tine last-mile process in trade ne­go­ti­a­tions, but be­cause of Trump him­self. a few days after the of­fi­cial an­nounce­ment that a deal in prin­ci­ple had been struck, Trump said that he would hold the agree­ment un­til after a deal was made with North Korea. so, whither KORUS?

why AMEND korus?

Rene­go­ti­at­ing the free trade agree­ment was not some­thing the south Korean gov­ern­ment wanted to do. The idea came from Trump. as an un­der­dog pres­i­den­tial can­di­date, Trump crit­i­cized all pre­vi­ous trade agree­ments as “hor­ri­ble,” gen­er­at­ing ter­ri­ble pain for amer­i­can work­ers. In his cat­e­gor­i­cal re­jec­tion of ex­ist­ing trade agree­ments, Trump made it clear that KORUS, which was once praised as the big­gest us trade pact since the North amer­i­can Free Trade agree­ment (NAFTA) and an ex­em­plary case of a win-win trade ac­cord, would be up for rene­go­ti­a­tion if he were elected.

but rene­go­ti­at­ing KORUS was not some­thing new. It had hap­pened be­fore. un­der strong pres­sure from the us, the agree­ment was ef­fec­tively re-ne­go­ti­ated even be­fore it went into force. Thenus Pres­i­dent barack Obama crit­i­cized KORUS as “un­fair” dur­ing his pres­i­den­tial cam­paign, cit­ing

south Korea’s lop­sided trade sur­plus in the auto sec­tor. The agree­ment, signed by Obama’s Re­pub­li­can pre­de­ces­sor, could not clear the fi­nal step of rat­i­fi­ca­tion in the us Congress. With the ar­rival of Obama, KORUS would not see the light of day with­out rene­go­ti­a­tions on au­tos. hence, the south Korean side was forced to sit down with the us once again. as a re­sult, the phase-out of tar­iffs was rene­go­ti­ated in fa­vor of Wash­ing­ton.

While the rene­go­ti­a­tion over au­tos paved the way for con­gres­sional rat­i­fi­ca­tion, the fate of KORUS also was se­ri­ously con­tested in seoul. Ironically, it was the cur­rent south Korean rul­ing party that ve­he­mently op­posed the agree­ment, with cur­rent Pres­i­dent Moon Jae-in at the fore­front of that op­po­si­tion. In the heated pres­i­den­tial race of 2012, Moon, as the can­di­date from the op­po­si­tion party, was openly crit­i­cal of KORUS. some mem­bers of the Na­tional as­sem­bly from his party even stormed the us em­bassy in seoul to de­liver a let­ter of op­po­si­tion to the agree­ment.

On the left side of the po­lit­i­cal spec­trum in south Korea, op­po­si­tion to KORUS was seen as defiance of amer­i­can ne­olib­er­al­ism. Op­po­nents of the agree­ment viewed the launch­ing of KORUS by left-lean­ing Pres­i­dent Roh Moo-hyun as both a mys­tery and a be­trayal. Through­out the process, south Korean ne­go­tia­tors were con­stantly hounded by de­mon­stra­tors. an­gry and wear­ing red head­bands, they seemed to be ev­ery­where. They trav­elled to all the ne­go­ti­at­ing venues, both in­side and out­side of south Korea. Mainly com­posed of farm­ers, mem­bers of la­bor unions and rep­re­sen­ta­tives of anti-amer­i­can NGOS, the de­mon­stra­tors shouted such slo­gans as “KORUS is a recipe for dis­as­ter! KORUS kills farm­ers and work­ers! Korea will be­come the colony of the us!”

The road to­ward com­ple­tion of the agree­ment was long and wind­ing. The KORUS talks be­gan in early 2006, and an agree­ment was signed by the two coun­tries in 2007, but they could not get to the im­ple­men­ta­tion stage. It took a right-lean­ing south Korean gov­ern­ment to rene­go­ti­ate the auto sec­tor be­fore KORUS be­came ef­fec­tive on March 15, 2012. In other words it took al­most five years after the ini­tial agree­ment to see the agree­ment en­ter into force. In light of this tur­bu­lent and treach­er­ous his­tory, KORUS al­ways rep­re­sented a del­i­cate bal­ance of in­ter­ests be­tween seoul and Wash­ing­ton, and within south Korea it­self.

smart pol­i­tics, bad ECO­NOM­ICS

KORUS ran into un­ex­pected tur­moil again in 2017 as Trump ramped up pres­sure to rene­go­ti­ate the agree­ment again, calling it a “job killer.” De­spite the pres­i­dent’s crit­i­cisms, in the five years since KORUS came into ef­fect, it has been widely seen as mu­tu­ally ben­e­fi­cial. un­der it, trade and investment flows be­tween south Korea and the us have been on the rise. The us mar­ket share in south Korea in­creased from 8.3 per­cent in 2012 to 10.6 per­cent in 2016, while the south Korean mar­ket share in the us im­proved from 2.6 per­cent in 2012 to 3.2 per­cent in 2016.

like any trade agree­ment, KORUS has not been free from dis­putes. With re­gard to is­sues such as rules of ori­gin and the ser­vice sec­tors, Wash­ing­ton has raised con­cerns, whereas seoul has sought to strengthen the in­vestor-state dis­pute set­tle­ment pro­ce­dure. These points of dis­cord, how­ever, could be ad­dressed in the con­text of the im­ple­men­ta­tion of KORUS, not as road­blocks that called for rene­go­ti­a­tions.

as for the widen­ing of the us trade deficit with south Korea un­der KORUS, the main­stream view is that this was not re­lated to any de­fect in the agree­ment, but rather to the pre­vail­ing macroe­co­nomic sit­u­a­tion in the two coun­tries. The strong re­cov­ery of the us econ­omy, in con­trast to the slug­gish per­for­mance of the south Korean econ­omy, has been cited as the main rea­son the us trade deficit with south Korea has widened.

ac­cord­ing to a re­port by the us In­ter­na­tional Trade Com­mis­sion (ITC), “The us trade deficit against Korea in 2015 was recorded at us$28.3 bil­lion, much less than the es­ti­mated deficit with­out the FTA.” The ITC es­ti­mated that the us trade deficit was re­duced by as much as by us$15.8 bil­lion be­cause of KORUS.

Trump’s view on KORUS was markedly dif­fer­ent from this con­sen­sus among trade ex­perts. he ar­gued that the grow­ing us trade deficit was sim­ply a sign of un­fair trade prac­tices. In par­tic­u­lar, he pointed at the auto sec­tor. ac­cord­ing to the us, from 2011 to 2016, the us trade deficit in goods with south Korea more than dou­bled, ris­ing from us$13.2 bil­lion to us$27.6 bil­lion. Dur­ing the same pe­riod, the us deficit in the auto sec­tor alone rose to us$24 bil­lion, an in­crease of 77 per­cent since 2011, ac­count­ing for nearly 90 per­cent of the to­tal deficit in 2016.

If Trump in­tended to flag this num­ber to show some­thing flawed in KORUS, he was wrong. south Korea’s au­to­mo­bile ex­ports to the us started to re­ceive the FTA pref­er­ences only from 2016. un­til 2015, the us main­tained its im­port tar­iffs on au­tos (2.5 per­cent) from south Korea. In other words, south Korean au­tos did not re­ceive any re­duc­tion in tar­iffs from KORUS from 2011 to 2016. In con­trast, us auto im­ports into south Korea en­joyed the FTA pref­er­ences (the elim­i­na­tion of the 8 per­cent tar­iff on im­ported au­tos) from 2012. hence, the in­creas­ing us deficit in the auto sec­tor dur­ing the pe­riod 2011 to 2016 re­flected fun­da­men­tal mar­ket forces — the strong eco­nomic re­cov­ery in the us and the com­pet­i­tive­ness of south Korean au­tos. Trump’s pres­sure to rene­go­ti­ate KORUS on the grounds of a grow­ing trade deficit in the auto sec­tor can’t sur­vive the scru­tiny of eco­nomic logic. If he were a stu­dent of eco­nom­ics 101, he would be given a fail­ing grade. any­one could see that his pur­suit of a rene­go­ti­a­tion of KORUS was po­lit­i­cally mo­ti­vated.

the NEW Nor­mal of trade pol­i­tics: trump Ver­sus Moon

Trump with­drew the us from the Trans-pa­cific Part­ner­ship (TPP) trade ac­cord in his first week as pres­i­dent. he also de­manded to rene­go­ti­ate NAFTA, blam­ing it for trade deficits and job dis­lo­ca­tions. Rene­go­ti­at­ing KORUS was part of Trump’s new mantra of “buy amer­i­can, hire amer­i­can.” Trump un­der­stands only one word: deficit. and he speaks of only one so­lu­tion: re­duc­tion.

Con­sid­er­ing his track record and ide­o­log­i­cal in­cli­na­tion, Pres­i­dent Moon may have wel­comed the de­mand from Trump to rene­go­ti­ate KORUS. For him, it could have of­fered a golden op­por­tu­nity to rec­tify any flaws in the agree­ment that he him­self strongly ob­jected to as a pres­i­den­tial can­di­date. More­over, the us pres­sure could pro­vide an op­por­tu­nity to play to his po­lit­i­cal base. Cu­ri­ously enough, Moon’s new gov­ern­ment, which came to power fol­low­ing the can­dle­light vig­ils that led to the im­peach­ment of Pres­i­dent Park Geun-hye, chose not to play head-to-head. as a re­sult, rene­go­ti­at­ing KORUS was chased by Wash­ing­ton, but avoided by seoul.

From the us view­point, bring­ing the un­will­ing south Korean side to the ne­go­ti­at­ing ta­ble was a pri­or­ity. Through­out the sum­mer of 2017, Moon’s gov­ern­ment was re­luc­tant to agree to a rene­go­ti­a­tion of KORUS, ar­gu­ing that the agree­ment was “win-win” and “bal­anced.” Moon changed his mind after Trump threat­ened to ter­mi­nate KORUS in septem­ber 2017.

bring­ing the south Korean side to the ne­go­ti­at­ing ta­ble was one thing, but con­clud­ing the ne­go­ti­a­tions in fa­vor of the us was another. The us was fully aware of the fear fac­tor for south Korea: agri­cul­ture. The south Korean gov­ern­ment was deeply con­cerned that the rene­go­ti­a­tions might open this po­lit­i­cal Pan­dora’s box. That was pre­cisely the rea­son be­hind Moon’s un­will­ing­ness to rene­go­ti­ate the deal in the first place.

From the start, south Korea’s lever­age was weak, and it got weaker as Trump threat­ened to ter­mi­nate KORUS. Many saw this hard­ball ap­proach by the us pres­i­dent as un­ex­pected from the coun­try’s clos­est ally, es­pe­cially when south Korea was un­der the in­ten­si­fy­ing se­cu­rity threat from North Korea’s nu­clear ad­ven­tur­ism.

when trade MEETS se­cu­rity

While rene­go­ti­a­tions were underway, Trump an­nounced plans to im­pose 25 per­cent tar­iffs on im­ports of steel and 10 per­cent on alu­minum from all over the world on the grounds of na­tional se­cu­rity, in­vok­ing sec­tion 232 of the 1962 Trade ex­pan­sion act. The euro­pean union, Canada, Mex­ico, south Korea and Ja­pan, all al­lies of the us, were in­cluded in the hit list, along with China and other coun­tries. The Trade ex­pan­sion act of 1962, with its sec­tion 232 (se­cu­rity ex­cep­tion), is a legacy of the Cold War. but even dur­ing the Cold War, sec­tion 232 was rarely used against non-al­lies. south Korea shipped 3.6 mil­lion tons of steel prod­ucts to the us last year, mak­ing it the third-largest steel ex­porter be­hind Canada and brazil. When an­nounc­ing the steel tar­iffs, Trump also sent an open in­vi­ta­tion to bi­lat­eral ne­go­ti­a­tions, which seoul quickly ac­cepted.

The essence of the deal, as an­nounced in late March 2018, was to ex­change con­ces­sions on au­tos for con­ces­sions on steel, ac­cord­ing to the south Korean gov­ern­ment. seoul made con­ces­sions on au­tos in KORUS in order to re­ceive an ex­emp­tion from the 25 per­cent tar­iff on steel ex­ports to the us. In the con­text of KORUS, us au­tomak­ers would be al­lowed to ex­port 50,000 ve­hi­cles to south Korea that do not com­ply with south Korean safety reg­u­la­tions per man­u­fac­turer each year. This num­ber dou­bles the fig­ure pre­vi­ously agreed un­der KORUS. These ve­hi­cles do meet us safety stan­dards and would be treated as such. south Korea also agreed to de­lay the phase-out of the 25 per­cent us tar­iff on south Korean pickup trucks un­til 2041, 20 years later than per­mit­ted un­der KORUS.

The two coun­tries also agreed to hold ad­di­tional talks to amend south Korea’s phar­ma­ceu­ti­cal pric­ing sys­tem. No new con­ces­sions were made re­gard­ing south Korea’s agri­cul­ture mar­kets, des­ig­nated by seoul as a non-starter in the trade talks. It is note­wor­thy that the amer­i­can agri­cul­tural sec­tor did not want to push the south Korean side hard to fur­ther open up. amer­i­can farm prod­ucts were al­ready en­joy­ing in­creas­ing sales in the south Korean mar­ket. In par­tic­u­lar, the case of amer­i­can beef was ex­tra­or­di­nary: amer­i­can beef oc­cu­pied the largest im­port share

of the south Korean mar­ket, a sharp break from the days of mas­sive protests in 2008 against us beef im­ports. Too much push­ing could back­fire, the us side must have thought.

The scope of the amend­ments to KORUS was less than ex­pected. This was in large part due to the us ne­go­ti­at­ing strat­egy. Wash­ing­ton al­lo­cated more re­sources to the rene­go­ti­a­tion of NAFTA. De­spite strong pres­sure, Canada and Mex­ico proved tough ne­go­tia­tors, much to the dis­may of Trump. un­like south Korea, which ne­go­ti­ated for an early exit from the sec­tion 232 tar­iffs on steel, Canada and Mex­ico did not opt for such an exit and re­fused to link the is­sue with the NAFTA rene­go­ti­a­tions. In re­turn for its con­ces­sions on KORUS, south Korea was granted a quota on steel im­ports that would be ex­empt from the new tar­iffs. un­der the ar­range­ment, south Korea will be al­lowed to ex­port to the us a vol­ume of steel equiv­a­lent to 70 per­cent of the av­er­age of south Korea’s ex­ports to the us over the last three years — free of the tar­iffs.

as it turns out, Wash­ing­ton linked other is­sues to the KORUS talks. The us dis­closed that a side agree­ment on cur­ren­cies was also ne­go­ti­ated. While the south Korean gov­ern­ment flatly de­nied such a deal, it came to be known that gov­ern­ment of­fi­cials from seoul and Wash­ing­ton had been ne­go­ti­at­ing on the is­sue of sus­pected south Korean cur­rency ma­nip­u­la­tion. seoul should have re­jected such ne­go­ti­a­tions on two grounds. First, un­like the us dol­lar and the euro, the Korean won does not have the priv­i­leged sta­tus of a key global cur­rency. sec­ond, south Korea’s trade de­pen­dency ranks among the high­est in the world. Com­bin­ing these two fac­tors, it should be clear that sta­bi­liz­ing the value of its cur­rency is an ut­most pol­icy pri­or­ity for south Korea. any for­eign at­tempt to la­bel this as cur­rency ma­nip­u­la­tion should be re­jected. some­how, seoul was trapped in the strate­gic big pic­ture of the us.

open­ing pan­dora’s box

Con­ven­tional wis­dom has it that trade dis­putes among al­lies should not be politi­cized. Only in those with non-al­lies do se­cu­rity con­cerns of­ten over­ride trade is­sues. In some high pro­file cases, se­cu­rity has been of­fered as ex­cuse for trade sanc­tions. In trade dis­putes among al­lies, how­ever, there has tra­di­tion­ally been con­fi­dence and trust among pol­i­cy­mak­ers that the se­cu­rity of al­lies would not be im­paired, even when trade dis­putes be­came too se­ri­ous to be re­solved. The rene­go­ti­a­tion process of KORUS am­ply demon­strated that un­der Trump, this con­ven­tional fire­wall be­tween trade and se­cu­rity among al­lies no longer ex­ists.

The ar­rival of Pres­i­dent Trump has seen sec­tion 232 be brought back from the dead. It now ap­pears the us in­tends to in­voke the “se­cu­rity ex­cep­tion” of sec­tion 232 to change the rules­based global trad­ing sys­tem. When he an­nounced new tar­iffs on steel and alu­minum, Trump in­di­cated a will­ing­ness by the us to ne­go­ti­ate bi­lat­er­ally with coun­tries on the hit list. by in­vok­ing sec­tion 232, the us is threat­en­ing to raise tar­iffs above the bound level the us has com­mit­ted to through the World Trade Or­ga­ni­za­tion (WTO).

The us, the ar­chi­tect and largest stake­holder of the rules-based mul­ti­lat­eral trad­ing sys­tem, has turned in­ward, as the slo­gan “amer­ica First” sug­gests. un­der Trump, the us will seek to pur­sue its do­mes­tic in­ter­ests, in­clud­ing the sec­toral in­ter­ests of de­clin­ing, so-called Rust belt in­dus­tries dis­ad­van­taged by in­ter­na­tional com­pe­ti­tion at the ex­pense of es­tab­lished global norms. Trump does not seem in­tent on pre­serv­ing the in­ter­ests of al­liances. he threat­ened to ter­mi­nate NAFTA and KORUS, un­less they were rene­go­ti­ated and amended on terms fa­vor­able to us do­mes­tic in­ter­ests. Trump’s per­cep­tion of al­lies was re­vealed when he said: “We are go­ing to charge coun­tries that take ad­van­tage of the us, some of them are our so-called al­lies, but they’re not al­lies on trade.”

the fu­ture of korus and the ‘trump risk’

Per­haps the best thing south Korea achieved from the ne­go­ti­a­tions with the us was to save KORUS. after the an­nounce­ment of the agree­ment, seoul was busy tout­ing the out­come as a south Korean vic­tory. The con­sen­sus among trade ex­perts was rad­i­cally dif­fer­ent. The 20-year de­lay in the elim­i­na­tion of the us tar­iffs on south Korean pickup trucks was not taken lightly. un­der the orig­i­nal KORUS, the us tar­iff was sup­posed to be elim­i­nated in 2021. No ma­jor auto ex­port­ing coun­tries have ne­go­ti­ated such a pref­er­en­tial deal. (In the TPP, Ja­pan got 30 years to elim­i­nate the us tar­iff on trucks.)

Pickup trucks are the most lu­cra­tive seg­ment of the us auto mar­ket. at 25 per­cent, the us im­port tar­iff is vir­tu­ally pro­hib­i­tive, giv­ing the big Three us au­tomak­ers vir­tual dom­i­nance of this highly prof­itable mar­ket. un­der the orig­i­nal KORUS, south Korean auto com­pa­nies could have ex­ported pickup trucks to the us with­out any tar­iffs within a few years. Now, un­der the amended KORUS, such a pos­si­bil­ity is long gone. The only com­mer­cially vi­able op­tion for south Korean auto com­pa­nies would be to pro­duce ve­hi­cles in the us. That would mean a high-pay­ing job cre­ation op­por­tu­nity in south Korea is gone.

In re­turn for con­ces­sions in the auto sec­tor, seoul got an ex­emp­tion from the 25 per­cent tar­iff on steel un­der sec­tion 232. Deeper scru­tiny re­veals a plethora of puz­zles. a lion’s share of south Korean steel is al­ready un­der puni­tive trade rem­edy mea­sures im­posed by the us, which means south Korean ex­porters are ex­pe­ri­enc­ing se­vere prob­lems in the us. If the quota is to be agreed, ex­ist­ing trade reme­dies should have been sus­pended. at the least, a us guar­an­tee for a sun­set clause for the ex­ist­ing trade reme­dies should have been se­cured. some­how, seoul failed to ob­tain this min­i­mum level of as­sur­ance.

What is more, seoul opted for an early exit from the sec­tion 232 steel tar­iffs by agree­ing to a quota. Quo­tas are pro­hib­ited un­der the WTO, an or­ga­ni­za­tion that the us cham­pi­oned to cre­ate and strengthen. Now, the us has de­manded a quota to re­duce south Korea’s steel ex­ports to the us in the name of se­cu­rity con­cerns. as the big­gest ben­e­fi­ciary of the rules-based trade sys­tem, south Korea could have joined with the eu, Ja­pan and other ma­jor coun­tries to crit­i­cize and op­pose the dan­gers of Trump’s use of sec­tion 232. In­stead, south Korea chose another op­tion. This could cre­ate an un­for­tu­nate prece­dent for fu­ture trade prob­lems with Trump.

The most wor­ri­some is the pos­si­bil­ity of fu­ture ap­pli­ca­tions of sec­tion 232. steel may be only the be­gin­ning. Trump toyed with the idea of 25 per­cent tar­iffs on auto im­ports. he or­dered a sec­tion 232 in­ves­ti­ga­tion into au­tos and auto parts. In rene­go­ti­at­ing KORUS, seoul should have adopted strate­gic fore­sight in ad­dress­ing this fu­ture pos­si­bil­ity. If some­thing sim­i­lar to steel takes place, all the pref­er­en­tial tar­iffs in au­tos and auto parts as agreed in the KORUS rene­go­ti­a­tions will prove use­less. It seems that KORUS, de­spite hav­ing been rene­go­ti­ated and amended, will have to live with the un­con­ven­tional and unpredictable Trump. Ironically, the amend­ments do lit­tle or noth­ing to re­duce un­cer­tainty and risk. byung-il Choi is pro­fes­sor and for­mer dean at the grad­u­ate school of in­ter­na­tional stud­ies, Ewha wom­ans univer­sity. he is also pres­i­dent-elect of the korea in­ter­na­tional Eco­nomic as­so­ci­a­tion; for­mer pres­i­dent of the korea as­so­ci­a­tion of trade and in­dus­try stud­ies; and for­mer pres­i­dent and CEO of the korea Eco­nomic re­search in­sti­tute.

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