South Korea’s external resilience to cushion US trade protectionism
KUALA LUMPUR: Local ratings house RAM Ratings expects the South Korea-US Free Trade Agreement (FTA) renegotiation process to take its due course and reach a compromise in addressing contentious trade issues between the two countries.
“South Korea’s external resilience will continue to be supported by the country’s export competitiveness and wide market access through expansive bilateral FTAs, amid rising challenges from trade protectionism,” noted Esther Lai, RAM’s head of sovereign ratings in a statement yesterday.
“While both countries had agreed to formally begin the renegotiation process in early October, amendments to the FTA will, in our view, take time to materialise owing to mandatory procedures such as economic impact studies, public consultations and ultimately ratification by the legislative branch of the respective nations.”
To note, the US had initiated a renegotiation of the FTA on the ground of a widening trade deficit with South Korea since the inception of the trade agreement.
The deficit had doubled from US$13.2 billion to US$27.6 billion during the 2011-2016 period, chiefly due to auto sector trade, which accounted for 90 per cent of the deficit in 2016.
While automobile imports from South Korea to the US have climbed over the past few years, RAM siad these were unlikely to have been driven by the FTA, given that the import tariff imposed on South Korean automobiles had remained unchanged from 2012-2015 under the trade framework.
“When the tariff imposed on passenger vehicles from South Korea had been fully eliminated in 2016, total imports from the latter had instead declined 2.5 per cent year on year,” it added.
“That said, non-tariff barriers currently imposed by South Korea on automobile imports from the US, such as an import quota based on safety standards, will likely be the key focus in upcoming negotiations between the countries.”
In RAM’s view, South Korea’s external performance remains underpinned by competitive exports – such as electronics, semiconductors, automobiles, petrochemicals and business services, among others – despite the US’s protectionist stance.
“This is evinced by the country’s healthy current-account surplus of 5.7 per cent of GDP in the first nine months of 2017, continuing from consistently wide surpluses averaging 6.2 per cent of GDP in the past five years.
“Furthermore, South Korea’s export-oriented policies have given it exceptional trade access to external markets, seen in the country’s active FTAs with a total of 52 countries, covering more than half of its global exports.
“South Korea global-scale sovereign ratings stand at gA A 3( pi )/ Stable/gP1(pi), premised on the country’s proven track record of economic resilience, its sturdy external position and prudent fiscal management, notwithstanding considerable geopolitical risk stemming from North Korea’s frequent threats of aggression and nuclear weapons programme.”