By Yoon Ja-young
With pressure continuing from U.S. President Donald Trump for a renegotiation of the free trade agreement between Korea and the United States (KORUS FTA), the two countries are likely to start talks next year.
Trump, however, is complicating the issue by solely focusing on the U.S. trade deficit, which would not be solved through renegotiation, according to Hyun Jung-taik, president of the Korea Institute for International Economic Policy (KIEP).
“There are legal procedures for renegotiation. The governments must notify, respectively, the National Assembly (Korea) and the Congress (U.S.), and a joint committee should organize a special meeting,” Hyun said.
“Since the U.S. is handling NAFTA first, which is a bigger deal than the KORUS FTA, the renegotiation with us would come only after talks over NAFTA.”
Hyun said reexamining the KORUS FTA is not a bad idea when considering that years have passed since its implementation. “There might be things that need improvement. We might need a revision to better reflect the changes in global surroundings.”
However, he said renegotiation won’t be easy since the U.S. president has only one motivation _ decreasing the U.S. trade deficit.
“There is no way to reduce the deficit by revising an FTA which basically aims at opening doors. The U.S. official who will be in charge of the renegotiation will be under great pressure since they would already know that it doesn’t work that way.”
He said that the U.S. president made the game difficult for his Korean counterpart to accept as well by declaring decreasing the deficit as the goal of the renegotiation.
“The fundamentals of negotiations is give and take. If decreasing the U.S. deficit is the goal, the renegotiated deal would not be approved by Korean public.”
It is evident that the KORUS FTA benefited the U.S. as well as Korea. According to data from the U.S. International Trade Commission (USITC), the KORUS FTA decreased U.S. deficit with Korea by $15.8 billion. It recorded a $28.3 billion trade deficit in 2015, but it would have been as large as $44 billion without the KORUS FTA.
“In bilateral free trade, there are third parties. The KORUS FTA helped the U.S. beat, for instance, Japan, in the Korean market, and vice versa for Korea. Especially, the U.S. saw huge a growth in services exports to Korea following the FTA,” he pointed out.
However, since the president of the U.S., the world’s biggest market, is focused on the trade deficit, Korea as well as other exporters such as China, Japan and Germany have to deal with it. Hyun advises the government to look at the matter from the broad perspective of the Korea-U.S. alliance.
“The KORUS FTA is neither the cause of the trade imbalance nor an effective means to correct it. However, Korea should promote the efforts it has been making to decrease the trade surplus, such as buying U.S. weapons, airplanes and shale gas.”
He also advises the government to watch negotiations over NAFTA which will precede the KORUS FTA. The U.S. may demand Korea to open the legal services market wider or take issue with Korea’s drug pricing. Korea, meanwhile, may demand its counterpart to be more transparent in the anti-dumping process. The renegotiation may also be good opportunity to improve protection for Korean investors in the U.S.
Hyun said the global atmosphere is not favorable since trade protectionism is increasing. “Korea was one of the biggest beneficiaries of the multilateral system under the WTO. There should be joint efforts to keep this.”
Despite the emergence of “strong men,” Hyun pointed out that there have been a few positive moves that aim at free trade, such as the agreement between the EU and Canada and the one between the EU and Japan. “The U.S. may give second thoughts to protectionism since the free trade agreement between the EU and Japan means the U.S. being left out,” he said.
Regarding China’s economic retaliation on the deployment of a U.S. missile defense system here, he said the retaliation would continue since THAAD has become a critical agenda item for Chinese leaders. He also pointed out that such a move was predictable since China is trying to nurture its domestic businesses in sectors where Korea has a competitive edge.
“Even so, curtailing trade would damage China as well since it has been importing key materials and components from Korea.”
He cited low oil prices, interest rates, and geopolitical risks as other external risks for the economy.
“Korea imports oil, but low oil prices have damaged Korea as well since its markets like Russia and Brazil were hit.”
He said the key rate hike by the U.S. is likely to hit Korea indirectly rather than directly since other developing countries will be hit harder.