Korea, America and the future of Asia trade strategy

Free trade agreements benefit the United States, despite with Donald J Trump says. Reneging on one with a staunch ally does not inspire confidence.

Korea, America and the future of Asia trade strategy AFP PHOTO/NICHOLAS KAMM

The South Korea-US Free Trade Agreement, or Korus FTA, is one of the United States’ most ambitious FTAs and it should rightly be strengthened, not discarded. After a painstaking six-year negotiation process, the Korus FTA significantly lowered barriers to trade between the countries and is one of only two FTAs that the United States has with an Asian country. It also reflects our highest ambitions for ensuring robust protection for intellectual property and offers a template for how other countries might develop robust standards for 21st century trade.

The Korus FTA has been in place for more than five years. Five years is a useful period for assessing not only how much progress both countries have made toward full implementation of the agreement, but also what impacts it has had overall. While leaders in both countries have seized on some of the agreement’s drawbacks, the US government has been particularly critical of its results. President Donald J Trump has expressed concerns that the agreement has not lived up to its ambitious promises, and he has questioned whether this and other US trade deals are fair and reciprocal.

This essay explores what is at stake in the Korus FTA renegotiations and discusses key considerations for sustaining American economic competitiveness and leadership in the Asia-Pacific. (The sides reportedly reached a new pact in late March.)

What is at stake?

The Asia-Pacific is the most economically dynamic region in the world and sound engagement is vital to US competitiveness in increasingly integrated global markets. Yet, during the past year, the United States has announced a series of policy stances that have begun to undermine our legitimacy in the Asia-Pacific and seemingly back us into a corner. Actions such as the withdrawal from the Trans-Pacific Partnership, the constant threats to leave the North American Free Trade Agreement (Nafta) and the Korus FTA, and recent efforts to implement Section 201 safeguards and Section 232 investigations have all tarnished the United States’ image as the champion of open markets and free trade. Similarly unfortunate is the sequencing of some of these actions – raising tariffs on South Korea and other partners under Section 201, while at the same time touting during Korus FTA negotiations that all countries benefit from removing tariffs.

These recent activities have sparked concern not only within South Korea, but also among observers who are hoping for the United States to advance a forward-looking and
comprehensive economic strategy.

Historically South Korea’s largest trading partner, the United States is now second behind China.

Ceding ground for American engagement in the region will likely have long-term repercussions as other countries look to fill any vacuum in US leadership. This withdrawal is also occurring at a time when China is expanding its influence in the region and around the world. As noted in a recent essay in the journal Asia Policy, China’s “multi-decade strategy is bearing fruit as Chinese power and interests are beginning to predominate,” while “US regional interests and leadership are challenged, and US economic and security policies relevant to Asia are incoherent.”

China’s emergence as an economic leader in the Asia-Pacific has rapidly progressed during the past two decades. Historically South Korea’s largest trading partner, the United States now is second behind China. The balance of exports from the United States and China to South Korea has flipped, with the United States accounting for 70 percent of South Korean imports from the two countries in 2000, but only 30 percent in 2016. In fact, among 19 Asia-Pacific nations, the only markets where the United States maintained a majority of imports in 2016 were Peru, Canada and Mexico. While this trend can partly be explained by China’s emergence as a major global economy and its proximity to many Asia-Pacific countries, by withdrawing from the region, the United States is ceding even more leadership and
standards-setting to China.

Korus: Getting into the details

Ultimately, the argument that the United States must stay engaged in regional free trade agreements to promote American leadership only works to the extent that specific agreements promote US interests. One of the Trump administration’s primary complaints about the Korus FTA is that the agreement has increased the US trade deficit in goods ($28 billion in 2016). This concern should not be ignored, but it should be placed in context.

First, the Korus FTA has genuinely led to an expansion of Korean imports from the United States, approximately 3 percent between 2011 and 2016. This figure sounds insignificant until one notes that South Korea’s overall imports from the world decreased by 23 percent during this same period. Second, part of this deficit in goods is driven by something that should be encouraged in a globalized market: US consumers having greater access to products and other goods, which in turn has boosted American competitive advantages is other areas. Indeed, the United States now has a surplus of $11 billion in trade of services with South Korea.

But more specifically, the strength of the Korus FTA is in its details: the high standards and positive norms from global trade that it promotes. The agreement eliminates 95 percent of tariffs, and exports of manufactured goods are up more than 8 percent from levels before it entered into force. It is estimated that “for each added billion dollars in exports, roughly 6,000 American jobs are created,” a benefit that is at the center of recent US economic strategy. In addition to the more sweeping benefits of tariff elimination and job creation, the Korus FTA either has already benefitted or has the potential to enhance various industries in the United States.

Intellectual Property: The Korus FTA raised standards for IP and trade secrets protection. This component of the agreement was deemed to be one of the most successful aspects of the original negotiations. By establishing mutually agreed upon policies for the treatment of IP and trade secrets, the United States and South Korea were creating the “gold standard” for trade. IP theft is a major concern for both countries, which increasingly rely on innovative industries to drive economic growth. As noted by the Commission on the Theft of American
Intellectual Property, the cost of counterfeit goods, piracy and theft of trade secrets to the US economy alone is estimated to exceed $225 billion, and could be as high as $600 billion. While some have rightly questioned whether all of the agreement’s IP provisions have been fully realized, this is an area where the United States should be strengthening its work with South Korea on full implementation, not weakening standards in any new negotiations.

FDI. The investment chapter of the Korus FTA encouraged increased bilateral foreign direct investment, and since 2011, South Korean direct investment into the United States has roughly doubled. South Korean companies that have established US offices support almost 52,000 US-based jobs. Protectionist tendencies exhibited by the United States, such as the recent announcement of tariffs on washing machines, which directly affect South Korean industry, threaten this important FDI relationship and could prevent future investments.

Agriculture. Agriculture was one of the more contentious areas of the original Korus FTA negotiations and continues to be a sensitive issue for both parties. The Korus FTA reopened the South Korean market for American beef and beef products, which had been restricted since 2003. The US beef industry saw an 18 percent increase in exports from 2011 to 2015 and exported $1 billion worth of goods in 2016. Other exports like potatoes and cherries have also seen substantial growth since gaining access to the South Korean market. In Washington State, exports of potatoes and cherries grew 80 percent and 200 percent, respectively.

Energy. The Trump administration has rightly indicated that expanding natural gas exports is an important element of how the United States can promote American competitiveness, and the Korus FTA plays a significant role in realizing this vision. The United States’ legal framework for natural gas exports is guided by the Natural Gas Act, as amended, which considers exports to FTA countries to be in the public interest and that applications should be authorized without modification or delay. For countries with which the United States does not have an FTA, natural gas exports must first be reviewed through a complex, extended process with the Department of Energy and the Federal Energy Regulatory Commission. As the United States transitions to become a net exporter of natural gas, South Korea is also seeking to increase the use of this fuel in its domestic energy mix. Although energy alone is unlikely to eliminate the trade deficit, it can boost US exports, while simultaneously bolstering energy security in South Korea.

Where are we now?

In light of the many considerations listed above, the outcome of the Korus FTA renegotiations will have a far-reaching impact on US geopolitical and economic influence in the Asia-Pacific, and therefore must be monitored closely.

The second round of negotiations concluded on Feb 1 in Seoul, and by all accounts appear to have been narrow in focus, with discussions centering on investor-state
dispute settlements, automobiles and trade remedies. Public statements from the lead negotiator on the US side, Assistant US Trade Representative Michael Beeman, have largely focused on trade in automobiles. Although American passenger vehicle exports increased from $418 million in 2011 to $1.3 billion in 2015, the South Korean auto industry accounts for between 70 percent and 80 percent of the trade surplus with the United States. The US team wants South Korea to reduce or remove non-tariff barriers to market access for US automobiles, including safety and environmental standards. The South Korean team is led by Yoo Myung-hee, director general of the Trade Policy Bureau. His team focused on safeguard measures and antidumping tariffs. This was particularly poignant in light of the recent decision by President Trump to implement tariffs on solar panels and washing machines. As noted above, these later tariffs in particular have direct implications for South Korea, even if they were imposed in a broader context than the Korus FTA negotiations.

Although energy alone is unlikely to eliminate the trade deficit, it can boost US exports while simultaneously bolstering energy security in South Korea.

The date for the third round of Korus FTA negotiations has yet to be announced as of Strategic Review’s press time, but it will also be important to track the ongoing Nafta discussions. Given that it is the first free trade agreement to undergo the Trump administration’s approach to renegotiating trade deals, many experts and policy makers are looking to the Nafta discussions to predict the outcome of the Korus FTA negotiations. No major advancements have been announced thus far, and any progress will likely be hampered by the campaigns for the upcoming Mexican presidential election in July and US congressional midterms in November.

Moving forward

As Korus FTA negotiations conclude, there are several key areas that policy makers must consider to ensure a positive outcome. First, modern trade agreements need to keep pace with innovative breakthroughs and advances. Although such technological disruptions occur at a faster pace than free trade agreements can be negotiated, the Korus FTA must include mechanisms to update and revise sections, particularly pertaining to the growing digital economy.

Second, it is critical for both countries to improve their understanding of the agreement and the benefits it provides. For example, restrictive health technology assessments can impede innovative medical devices from gaining access to the market, with negative consequences for public health. More transparent dialogue may reduce uncertainties that were initially responsible for boundaries.

Finally, it is imperative that the United States not abandon its allies. Security and economics cannot be separated, and the Korus FTA is at heart a landmark agreement for engagement that was built on decades of security cooperation and shared values. Reneging on an agreement with a staunch ally does not inspire confidence for other countries with which the United States may be seeking to negotiate future trade agreements.

Charles Boustany Jr is a counselor at the National Bureau of Asian Research (NBR) in Seattle, Washington.
Clara Gillispie is the bureau’s senior director for trade, economics and energy affairs. Strategic Review has a content-sharing agreement with NBR.

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