By Yoon Ja-young
Scrapping the free trade agreement (FTA) between Korea and the United States will damage the U.S. more than Korea as the drop in U.S. exports to Korea will be steeper than the fall in Korea's exports to the U.S. Instead, the U.S. is likely to demand a partial revision, including reintroduction of a merchandise processing fee (MPF), a think tank said Friday.
The Korea Institute for Industrial Economics and Trade prepared the report on how changes in the Korea-U.S. FTA (KORUS FTA) will affect exports and imports. The Ministry of Trade, Industry and Energy requested the report earlier this year following U.S. President Donald Trump's inauguration.
Trump has been criticizing trade deals, including the one with Korea, as "job killers" since he was campaigning for the election, prompting speculation the U.S. will push for the deal's renegotiation.
The institute said there are three possible scenarios for the KORUS FTA: the U.S may demand a total scrapping or partial revision or maintain it.
If the bilateral deal is scrapped, the two countries will apply tariffs according to the most favored nation (MFN) treatment of the World Trade Organization (WTO). As a result, Korea will apply tariffs between 4 and 9 percent and the U.S. 1.5 to 4 percent. Both now apply near-zero tariffs under the KORUS FTA.
If tariffs rise because the deal is scrapped, Korea's exports to the U.S. are expected to decrease by $1.3 billion while U.S. exports to Korea will plunge $1.5 billion. Since it means the U.S. trade deficit with Korea will increase by $200 million, the institute said it is unlikely the bilateral deal will be dropped.
The U.S. may choose to maintain the KORUS FTA and resort to other measures to restrict Korea's exports. For instance, it may strictly apply a country-of-origin clause in the deal. The institute expected small and medium enterprises to be hit hardest because it is costly for them to meet this clause.
If the U.S. strictly applies the clause, it is likely to decrease Korea's exports by $400 million. But the report notes that the Trump administration would have no political gain if it leaves the deal as is.
The institute expected the deal's revision is the most likely scenario. In that case, the U.S. may want to revise the MPF exemption clause. U.S. Customs charges MPF on imports, but the KORUS FTA exempts Korean goods. If the U.S. levies MPF on Korean goods, it will increase their price. Korea's exports to the U.S. are then expected to decrease by $200 million, according to the institute.
However, some experts doubt the MPF will be the target since the U.S. exempts it in most of the FTAs it has signed. And it hasn't mentioned the MPF.
The United States Trade Representative (USTR) noted in a report that "Increased access to Korea's automotive market for U.S. automakers remains a key priority for the United States."