Photographer: SeongJoon Cho/Bloomberg

‘Horrible Deal’ or ‘Gold Standard’: The Korea-U.S. Trade Pact

For President Donald Trump, the free trade agreement with South Korea is a "job killer" -- a "horrible deal" that’s costing the U.S. $40 billion a year.

The architects of the deal on both sides disagree with Trump’s characterization of the deal, which was heralded as a "gold standard" for FTAs when it came into force in 2012, and still has strong advocates in the American business community as well as in Korea.

Now that U.S. Trade Representative Robert Lighthizer has given written notice of his intention to open discussions on the agreement, supporters of Korus, as the FTA is often referred to, are busily preparing their case for its defense. Those talks should happen soon, with the U.S. requesting them by mid-August.

Trump’s view that the deal is the root cause of his nation’s growing trade deficit with Korea is wrong, according to Kim Jong-hoon, the former trade minister who was Seoul’s chief negotiator. Kim contends that Trump needs to look at structural issues inside the U.S. economy that go much deeper than its trade with Korea, and have been around much longer than the FTA.

While the Trump administration has pointed to America’s deficits in trade in cars and steel with Korea as key problems, Kim argues that theses imbalances would be difficult to change through amendments to the FTA. He stresses that America simply consumes more than it produces, making trade gaps inevitable with many nations.

"I doubt the U.S. would have an answer to exactly what amendments to the Korus FTA would help them erase the deficit," he said in an interview in July.

The U.S. has imported more goods than its sold since the 1970s, said Kim, noting that a growing amount of America’s value-added economic output has shifted into services.

“If we apply the U.S. logic, we should ask them to reduce our services deficit,” said Kim.

While America’s services surplus is dwarfed by the goods deficit, it has doubled over the past decade and is an area where the U.S. could potentially keep making gains, given its highly skilled and educated workforce.

Wendy Cutler, who was Kim’s counterpart in the talks as then acting deputy U.S. trade representative, has echoed those ideas.

She said in March that the increased bilateral trade deficit "has nothing to do with the agreement," but was instead caused by sluggish Korean economic growth and lower demand for imports, as well as strong demand from a growing U.S. economy.

"Korea has put forward an interesting proposition," Cutler, who’s now a vice president of the Asia Society Policy Institute, said in an interview in July. "What Korea is saying is, before we start talking about amendments to the agreement, let’s jointly look at the root causes of our bilateral deficit. That could be a useful exercise."

But it’s not just the causes that are in dispute. Both governments have different numbers for the size of the deficit.

U.S. figures indicate its goods deficit with South Korea was $27.7 billion last year, or about $4.4 billion more than the number Korea came up with.

Once you put back in the U.S. surplus in services, the overall deficit with Korea shrinks to $17.6 billion, and accounts for less than 4 percent of America’s total trade gap with the rest of the world. However, that deficit has more than doubled since 2012, when it was $7.7 billion.

Muddying the waters further, Trump has said that Korus is costing the U.S. $40 billion, but it’s not clear what this refers to.

Yeo Han-koo, the current director-general for trade negotiations at Korea’s trade ministry, has indicated he wants more consideration for the amount of investment that’s been made in the U.S.

"Korean companies invest in the U.S. and those companies buy components from Korea," he said in a July 13 press briefing after receiving Lighthizer’s letter. "It has been beneficial to both countries."

Yeo has vowed to "boldly" make Korea’s case, and has also warned of costs to the U.S. if it ever sought to scrap Korus. He cited U.S. cattle ranchers and more than 20 American law firms doing business in Korea as big beneficiaries of the deal.

The FTA "is not perfect, but it’s working," according to Tami Overby, who heads the U.S.-Korea Business Council. She wrote in March that Korean imports from the U.S. had actually grown over the five years since the deal was signed, whereas Korea’s total imports from the whole world were down almost 23 percent in 2016 from 2011. 

"Korus has been a benefit to both economies," she wrote. "The agreement has benefited U.S. exporters of manufactured and agricultural goods and service providers, and strengthened the economy of a long-time U.S. ally and key security partner in the Asia-Pacific."

Yet the tough talk out of Washington may be having an effect to Trump’s liking. South Korean companies are eagerly signing deals to buy U.S. gas and the government in Seoul is keen to reduce friction where it can.

Based on the first five months of this year, the U.S. deficit for 2017 could come in around $12.5 billion, well down on 2016, according to Jeffrey Schott of the Peterson Institute for International Economics.

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