International Trade

Withdrawal from the U.S. – Korea Free Trade Agreement Is a Losing Proposition for America

After months of invective about America’s trade imbalance with South Korea, the Administration appears to be seriously considering withdrawal from the U.S.-Korea Free Trade Agreement (KORUS FTA). Unlike ratification, withdrawal from the FTA can be accomplished without Congressional approval, meaning that conceivably KORUS FTA could cease to exist within six months of the President’s written withdrawal letter – March 2018, if issued in September. Leaving the highest standard trade agreement the U.S. currently has in force signals division between the U.S. and South Korea at a critical strategic juncture and would negatively affect America’s economy and consumers.

Trade agreements are one of the most potent devices in America’s soft power toolkit, supplementing treaties and aircraft carriers to communicate U.S. regional priorities and to secure regional influence. At a time when there should be very little daylight between America and South Korea, a trade spat conveys disunity. As if to underscore the high stakes involved, this weekend North Korea conducted its largest nuclear test ever. America’s credibility in the Asia-Pacific region is generally low due to the Trump administration’s withdrawal from the Trans-Pacific Partnership Agreement (TPP), and in Korea specifically because of a somewhat rocky start to the relationship between President Trump and Korean President Moon Jae-in – giving America less than optimal leverage in trade negotiations. Moon and Korea’s trade minister emphasize that renegotiation is a two-way street and that any South Korean concessions to U.S. demands would have to be met with comparable U.S. concessions. South Korea’s confidence is bolstered by its commercial alternatives to the United States. South Korea has multiple FTAs in the Asia-Pacific region, as well as with Canada and the European Union. While not a Trans-Pacific Partnership (TPP) negotiating partner, South Korea attended a March 2017 trade summit hosted in Chile for former TPP countries, and would be a likely participant down the road.

Withdrawal from KORUS FTA is all the more inexplicable as it benefits American exporters. Ninety-five percent of South Korea’s historically high tariffs have been lifted on American goods with the elimination of additional tariffs to be phased in. While U.S. goods exports to South Korea have not lived up to pre-KORUS expectations, macroeconomic factors – not a poorly negotiated deal – are largely to blame. The agreement was implemented just as international trade was decreasing globally including in South Korea, and economists argue that the trade deficit with South Korea would be larger absent the framework. Some U.S. business sectors, such as beef and autos, have enjoyed sharp increases in exports to South Korea since the FTA took effect. Beef exports have risen 82 percent and are growing.   LNG exports are just starting to flow, and could help chip away at the bilateral trade deficit driving the Administration’s KORUS FTA positioning. Withdrawal from the agreement could lead to an immediate tariff increase to 14 percent on American exports to South Korea rendering U.S. goods uncompetitive there and eroding recent market share gains made by U.S. firms.

KORUS FTA works for American consumers. The elimination of U.S. tariffs on Korean products has made consumer goods like autos and electronics more affordable for American families. And far from being the “job killer” described by the President, KORUS FTA has also encouraged Korean companies to invest in Americans. South Korean foreign direct investment (FDI) has more than doubled since the agreement came into force, and Kia and Hyundai employ thousands of American workers. Commerce Secretary Wilbur Ross’s presence just last month at a groundbreaking ceremony in Clarksville, TN for an LG facility that is projected to provide 600 “family-sustaining jobs” upon its completion underscores FDI’s job creation potential and the trade deficit as an inadequate measure of a trade agreement’s worth.

KORUS FTA is imperfect. The U.S. auto industry complains, justifiably, about non-tariff trade barriers governing safety standards, and there have been problems in areas ranging from customs to transparency in the medical device and pharmaceutical sectors. However, these problems can be resolved through joint implementation talks and amendments to the FTA that fall far short of withdrawal from or renegotiation of the framework. Improving the existing agreement is far wiser than scrapping it in a vain attempt to negotiate a better one.

Trade deficits are not a meaningful measure of an FTA’s economic and strategic value, and despite America’s size and power, we should remember that the world has trading options that can exclude us. When America abandoned TPP, our negotiating partners soldiered on. American withdrawal from KORUS FTA would end similarly. America’s standing in the Asia-Pacific would be further eroded; China would be further emboldened; and hardworking American families would pay the price.

In Depth: International Trade

International trade creates and supports millions of American jobs that offer higher than average wages and drive economic growth. As a testament to the strength of American entrepreneurship, the vast majority of U.S. exporters are not large corporations but small to medium-sized enterprises. Those that doubt the power of global…

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