Donald Trump, the Republican nominee for the United States presidency, said on Aug. 8 that the four-year-old free trade agreement between South Korea and the US was a “perfect example of broken promises and that it “doubled our trade deficit with South Korea and destroyed nearly 100,000 American jobs.” That is not true.
According to a recent report published by the Korea International Trade Association (KITA), “An Evaluation of Four Years of KORUS FTA and its Implications,” the US was the third largest importer of South Korean goods in 2015. South Korea exported 12 percent of its total exports to the US, following China at 26 percent, and ASEAN at 14 percent. The US (10 percent) was the fifth largest exporter to South Korea, following China (21 percent), the EU (13 percent), Japan (10.5 percent), and ASEAN (10.3 percent).
According to KITA, total trade between South Korea and the US in 2015 was US$113.8 billion, which accounted for 11.8 percent of all South Korean trade. South Korea’s trade surplus with the US was US$25.8 billion, an increase of US$800 million from 2014. The US claims that the KORUS FTA resulted in a worsening of its trade balance.
However, more than two-thirds of South Korean exports to the US, 67.2 percent, are exempted from the KORUS FTA. The goods that led South Korea exports to the US are mostly those that did not benefit from the trade deal, such as automobiles, cell phones, and semiconductors. According to KITA, these three account for 40 percent of the total of US$69.8 billion in imports: automobiles accounted for US$17.5 billion, cell phones for US$6.3 billion, and semiconductors for US$2.5 billion. In the case of automobiles, the 2.5 percent tariff from before the agreement was still in effect until 2015. Cell phones and semiconductors were customs-free even before the KORUS FTA. The US trade deficit increased not because of the agreement but simply because the overall deficit in the trade of goods increased.
Unbalanced Interim Evaluation
Early this June, Mark Lippert, US Ambassador to South Korea, argued that we should resolve the remaining issues of the agreement when he spoke at the Institute of Global Economics. He urged full implementation by South Korea, mentioning issues such as South Korea still being a country hard to do business with, and that it should open its legal services market. He also called for South Korea to join the Trans-Pacific Partnership, the TPP trade agreement. A proposal to renegotiate the KORUS FTA is also gaining momentum as Trump advocates strong protectionist policies.
A report by the United States International Trade Commission (USITC) published this June, “Economic Impact of Trade Agreements Implemented Under Trade Authorities Procedure,” inflamed a controversy in South Korea. Media reported that the Korean agreement was second only to NAFTA in increasing US exports among the 13 US free trade agreement. The Korean Ministry of Trade, Industry and Resource disavowed the reports, saying that the claims are not based on the main text of the US trade commission’s report, but on peripheral material, and that the source was not intended for this report. It also added that it is not fair to simply compare statistics, as the report cited research studies that follow different time frames. As in the US, balanced media reports on the issue were difficult to find in South Korea.
US Obsessed with Opening Legal Market
The US government is urging full implementation of the opening of South Korea’s legal market and strongly opposes the “Foreign Legal Consultant Act” that South Korea recently revised. According to the World Bank, the services sector accounted for 78 percent of US GDP in 2015. This is a whopping 18 percentage points higher than South Korea’s 60 percent. The Korea Trade-Investment Promotion Agency reports that the US services surplus with South Korea in 2015 was US$10.7 billion, half of its goods deficit. The US strategically chose opening of South Korea’s legal services market as a way to decrease its trade deficits with South Korea. South Korea, however, has not fully committed to opening its legal services market.
The South Korean government promised to open its legal market in three stages. The third stage, to take place five years after the FTA takes effect, is to allow the establishment of joint ventures between US and South Korean law firms, making it possible to hire domestic South Korean lawyers. The Foreign Legal Consultant Act, which came into effect in February, contained similar measures. Foreign law firms have pointed out various problems. The most serious is foreign equity ownership restrictions, which do not allow for the procurement of management rights. Foreign participants of joint ventures cannot own more than 49 of every 100 shares, and voting rights are exercised according to the ratio of shares.
Another reason that foreign law firms are reluctant to establish joint ventures is their liability for damages. This is because foreign law firm headquarters, the principal agent of joint ventures, take joint responsibility with the representative of the joint venture. It is also not easy to find a South Korean joint venture participant, the other axis of the joint venture. Only South Korean law firms that have operated normally for a minimum of three years are eligible.
Sympathy for the Steel Industry
The South Korean government selected the steel industry as a representative issue among trade in commodities. Last June, KOTRA published a report entitled, “US’s background of trade pressure and future prospects for South Korea.” It determined that the background of the trade pressure was a legislative strategy of the US executive branch to ratify the TPP by following a generally known preliminary model, the KORUS FTA. The problem is that among the 17 FTA partner countries of the US, the trade balance with South Korea is worsening most rapidly.
The KOTRA report defines strengthening import regulations on Korean steel as exemplary trade pressure from the US, and dealt with it in-depth. It found that the discontent surrounding an increased trade deficit following the KORUS FTA is unpacked in antidumping and countervailing duties. Last year, there were seven investigations into South Korean steel and metal goods, second only to China’s 11 investigations. Currently, there are ongoing investigations of seven antidumping and four countervailing duties cases for seven South Korean items.
There is a noteworthy fact in the KOTRA report. The amount of exports to the US for the related items in 2015 was US$1.6 billion, only 2.3 percent of total exports. This proportion is too small to treat as a representative South Korea-US trade issue. The figure cited above only amounts to 5.5 percent (18 cases) of the US’s antidumping and countervailing duties cases (330 total cases). It is fourth after China (40 percent), India (7 percent), and Taiwan (6.6 percent). The steel industries of both South Korea and the US face harm from the China-led global steel oversupply.
The Positive Sum Game
South Korea and the US are already each building mini-WTOs through dozens of FTAs. There exists a phenomenon where total trade volume among FTA partners is increasing, while trade volumes with non-FTA partners are in relative decline. According to KITA, last year South Korea’s US import market share was 3.2 percent, the highest in the past 15 years, while the gap between South Korea’s and Japan’s market share decreased to an all-time low of 2.65 percent. The US share of South Korea import market was the highest in the past five years, at 10.1 percent, and the difference between market shares held by the US and Japan narrowed to an all-time low of 0.4 percent. In January 2016, the US overtook Japan.
South Korea and the US are ironically arguing that each of their countries suffered a greater loss as a result of the FTA. Both are producing analyses advantageous to their own political objectives. South Korea highlights the steel industry as a representative trade issue, which only accounts for 2.3 percent of total exports. The US does not mention its US$10.7 billion surplus in trade in services gained by white collar workers.
Third Way points out in “Night and Day: Post-NAFTA Trade Deals Yield Steady Surplus,” that the US services balance was intentionally excluded from the report. This is because the size of the US surplus in trade in services is so large that it could make commodity trade results appear ambiguous, and also because of concerns that the benefits of the FTA may not go to blue collar workers such as construction workers. The problem is that the positive effects of the FTA have been obscured. For example, the USITC report estimated that the KORUS FTA has resulted in an economic effect of the US trade deficit with South Korea decreased by US$15.8 billion.
A hasty interim evaluation is not desirable as the fourth anniversary of the FTA arrived. It is more so in the case of commodity trade. This is because most tariff elimination is enforced this year, the fifth year of the FTA. We need more time for a practical assessment of the effects of the FTA. For trade in services, irrational government regulation such as ownership restrictions on foreign law firms in the Foreign Legal Consultant Act should be avoided.
An FTA is not a zero-sum game where one benefits as much as the other party loses. Imprudent criticism following political rather than economic logic should be avoided. One sure thing is that the trade volume of both countries will continue to increase, and their respective shares of the import market of their partner country will also rise. An approach from a positive sum game perspective which increases the size of the market among FTA partners and spreads benefits among them is necessary.
Junseong An, an attorney-at-law licensed to practice in the US state of Maryland, wrote this for the East Asia Foundation. The views expressed here are those of the author.