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Lessons From the Korean Trade Agreement

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Lessons From the Korean Trade Agreement

April 11, 2018

As the United States and Chinese tariff threats grow increasingly more volatile, many have begun to fear the possibility of a trade war. However, the new U.S. - Republic of Korea Free Trade Agreement (KORUS FTA) addresses many of the problems that President Trump has pronounced as harmful to the economy and national security. While the positive effects felt in specific industries may be less significant than Representative Lighthizer and President Trump would have you believe, the renegotiated deal does represent meaningful progress in improving U.S. trade relationships.

South Korea is America's sixth largest trading partner. In 2016, the two nations exchanged $144.6 billion in goods and $32.4 billion in total services, just over 3 percent of U.S. total trade. The United States had a services surplus worth $10.7 billion. However, America imported $70 billion of goods from Korea and only exported $42 billion, leaving a trade deficit in goods of nearly $28 billion.

The new agreement will increase South Korean sales of American-made vehicles by allowing more vehicles that meet U.S. safety standards, though not necessarily South Korean standards, into South Korea. Under the previous agreement, 25,000 American manufactured automobiles could enter the market after passing U.S. safety standards; that number will now double to 50,000.

That increase may not represent as significant of a change for U.S. auto companies as initially thought. There are currently42,000 American made vehicles in all of Korea, less than the 50,000 threshold set under the new agreement. Of the 42,000, nearly two-thirds were vehicles from German or Japanese auto companies that were produced in American plants.

Consumer choice is responsible for much of the dominance of brands such as Mercedes and Honda. South Koreans have a preference for luxury options, and  South Korea is Mercedes' sixth-largest market. American companies such as GM, Ford, and Chevrolet, will experience some benefits. However, it is unlikely they will come to dominate the Korean market and ultimately balance the trade deficit in the auto sector.

The revamped deal will also extend a 25 percent tariff on South Korean pick-up truck exports to the U.S. through 2041. South Korea's top negotiators claimed the tariff, which was initially set to expire in 2021, would have little effect on South Korean automakers since they do not currently produce pickup trucks to be exported to the United States. However, in 2015 and 2016, Hyundai displayed truck prototypes that may have been created in the next few years, if the producer was hoping to enter the market after the tariffs expired. Hyundai's labor union called the agreement "humiliating" and accused Americans of proactively blocking South Korean companies from competing within the U.S. truck market.

Incorporated into the agreement is an exemption of Korean steel from the 25 percent tariff recently signed by President Trump. Rather than a tariff, steel exports will be subject to a product-specific quota equivalent to 70 percent of steel imported from 2015 - 2017. According to the Peterson Institute for International Economics, Korea's agreement to the steel quota is significant to the United States as it represents the first step in boosting "capacity utilization of the domestic steel industry to 80 percent."

The United States may continue to try and leverage quotas against foreign producers to decrease their involvement in the steel market. Quotas, if placed against countries like Brazil, Japan, or the EU, whom we import nearly a third of our steel from, could decrease the available supply. A shortage that President Trump hopes domestic suppliers would fill.

No one walks away from the negotiations a clear winner; much of the trade agreement is comprised of small concessions and victories on both sides. While the new agreement may not create major economic stimulus, the political importance of the renegotiations should not be overlooked. South Korean and American negotiators updated the agreement's terms in a way that reflects a strengthening relationship between trade partners.

While many of the underlying characteristics are different, the deal struck between the United States and South Korea could serve as a template for future negotiations. KORUS FTA represents to the world America's willingness to continue improving its trade relationships despite the ongoing tensions. 

Jacob Reyes is a contributor to Economics21. Follow him on Twitter @Jacob_DReyes

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