South Korea Is the New Front in Trump’s Trade Strategy

July 7, 2017 11:30 AM
Photo Credit: 
REUTERS/Christian Charisius,Pool

After bashing trade relations with China, Mexico, and Europe since taking office, President Trump has set his sights on renegotiating the Korea-US Trade Agreement (KORUS) in force since 2012. With South Korean President Moon Jae-in at his side on June 30, he said such talks should begin “right now.” 1 The reaction of the leadership in Seoul is not clear, but even if Trump ultimately wins some new concessions from the Korean side, there is unlikely to be a major change in what is the president’s main concern, the trade deficit between the two countries. That is because the deficit is primarily determined not by the height of trade barriers but by the size of US budget deficits and the foreign exchange value of the dollar.

Both as a presidential candidate and in office, Trump has characterized KORUS as “horrible,” citing the larger US merchandise trade deficit with South Korea ($28 billion in 2016 versus $17 billion in 2012), and Korean barriers to US auto sales. In their private talks, Trump brushed aside President Moon’s defense of the bilateral trade deal. On July 3, 2017, Inside US Trade revealed that the US Trade Representative will formally seek amendments during the first KORUS joint special session to be convened soon.2 So far, it remains unclear whether the trade deal would be reopened and subject to congressional oversight similar to the new North American Free Trade Agreement (NAFTA) talks, or whether the “renegotiation” would simply entail a discrete agenda of one-off deals in certain sectors, which would not require changes in US law.

Whatever the ultimate outcome of talks with Korea, there is little or no prospect that the new front, or indeed the several existing fronts of Trump’s trade strategy, will make a material difference in the US global trade deficit. Yet, in Trump’s view, trade deficits are decisive proof that US trade policy since President Ronald Reagan has been a walking disaster.

Moreover, alongside NAFTA talks scheduled to begin in September (to rectify what Trump has called “the worst trade deal ever signed”), Trump’s KORUS initiative raises the prospect of “competitive renegotiation.” “Competitive renegotiation”—if that’s Trump’s tactic—would compare best offers from Canada, Mexico, and Korea. The deficient countries would then be asked to improve their offers, or risk termination of their trade agreements with the United States.

Trump's trade strategy is broadly motivated by the goal of expanding “trade in a way that is freer and fairer for all Americans.” As operational guidelines, Trump seeks to reduce US bilateral trade deficits (preferably by expanding US exports but if necessary by contracting imports) and ensure that foreign barriers on US exports are no higher than US barriers on imports of the same products (otherwise known as “mirror-image reciprocity”). At the same time, Trump seems unwilling to acknowledge, much less dismantle, the multiple barriers that shield US markets for goods and services from foreign competition. Economic research shows that removing domestic import barriers improves US prosperity as much, if not more, than removing foreign barriers to US exports. Trump and his trade officials seem oblivious to this research.3

Trump’s strategy could result in some new market access in US trading partners if they agree to expand purchases of US goods and services without any reciprocal concessions from the United States. This outcome would be welcomed by US exporters.

Some of Trump’s negotiating demands will be unique to each trade agreement, but Trump’s emissaries may try to make major demands on Canada, Mexico, and Korea, hoping that assent by one will lead to capitulation by all. What proposals might fall in this category? Examples include:

  • Commitments to the effect that bilateral trade imbalances between free trade agreement partners require measures by the surplus country to increase its imports from the deficit country.
  • Reinforced by commitments against currency manipulation and possibly currency undervaluation by any partner, a central negotiating objective of the Congress outlined in US Trade Promotion Authority.
  • New intellectual property protections in pharmaceuticals, such as agreement to 8 or even 12 years of exclusivity for a firm’s test data on new biologic drugs, effectively blocking trading partners from producing generic versions of US drugs. This was a central point of contention in the Trans-Pacific Partnership negotiations.
  • Phase out Canadian and Korean barriers to US agricultural exports over a 10-year period (Mexican barriers are almost eliminated), except for products that the United States insists on protecting, like sugar, peanuts, and tobacco.
  • New auto trade rules (tariffs, standards, rules of origin) to approach a world where US auto and parts production approximately equals US auto sector consumption.

So far Trump’s trade strategy has not provoked an outburst of retaliation. But the world is getting closer to real trade fights as opposed to rhetorical battles. According to the latest Global Trade Alert, so far in 2017 US policy changes have hit the commercial interests of other G-20 countries 189 times, a 26 percent increase over 2016. The share of US imports subject to trade restrictions such as antidumping and countervailing duties would increase from 3.8 percent at the end of 2016 to 7.4 percent in 2017 if the Trump administration were to impose new import restrictions as a result of investigations being pursued during the administration’s first “100 days” in office (Bown 2017). Trump has set in motion plans for new US import restrictions on high-profile products such as steel, aluminum, and solar panels. To round out the saga, Trump has successfully bullied CEOs of multinational companies to build or retain production facilities in the United States.4

Perhaps Trump’s bluster will prompt modest market-opening measures by US partners. For example, in their short honeymoon, Chinese President Xi Jinping and Trump proclaimed a 100-day plan to boost US exports, starting with beef sales and Chinese operations of US credit rating agencies (Moody’s, Standard & Poor's, Fitch).5 In a similar vein, South Korea might double the number of US autos that can be imported if they meet US safety regulations (not Korean standards) from 25,000 to 50,000 vehicles per automaker. Canada might relax (but not eliminate) its restrictions on milk and poultry imports from the United States. Mexico might sign long-term agreements to buy US natural gas.

If Trump welcomed such concessions as great American victories, as he did with the first installment on the Chinese 100-day plan, the outcome would be welcome, especially if it averts a trade war. But this happy ending would not significantly reduce the US global current account deficit, which seems likely to rise from $481 billion in 2016 to a projected $523 billion in 2017 according to the IMF, thanks to macroeconomic forces: the budget deficit, the overvalued dollar, and the strong US economy.

As events unfold, if Trump grows frustrated with the trade deficit and turns to unilateral trade restrictions on a large scale—which he has ample presidential power to impose—there will be no happy ending.

Notes

1. Trump said specifically: “We are renegotiating a trade deal right now as we speak with South Korea, and hopefully it will be an equitable deal—it will be a fair deal to both parties. It’s been a rough deal for the United States, but I think that it will be much different and it will be good for both parties. So we’re in the process of doing that.”

2. “USTR to request first-ever KORUS joint committee special session to amend agreement,” Inside US Trade, July 3, 2017 (accessed on July 5, 2017).

3. For the payoff to the US economy from globalization, see Hufbauer and Lu (2017).

4. Carrier, Ford, General Motors, and Foxconn have seemingly acceded to Trump’s demands, but perhaps by announcing plans already settled for commercial reasons.

5. The continuance of North Korean provocations, despite Trump’s hopes that Xi would restrain Kim Jong-un, seems to have ended the honeymoon. It remains to be seen what further trade concessions China might make.

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