US trade surplus in service sector remains unaddressed in tariff deal

The Google logo is seen on the Googleplex, the corporate headquarters of Google and its parent company, Alphabet, in Mountain View, Calif., July 22 / EPA-Yonhap

Korea has struck a tariff deal with the United States in exchange for large-scale investment in the U.S. and the purchase of American energy, but the agreement left Korea’s billions of dollars of chronic loss in the service sector trade unaddressed.

President Donald Trump said the U.S. was losing money to Seoul, with Korea seeing a record surplus volume of $118 billion last year, and pressed for a “reciprocal” tariff of 25 percent. On Thursday, the rate was lowered to 15 percent following a series of negotiations.

But a breakdown of bilateral trade figures last year shows that Korea suffered a record trade deficit of $7.18 billion in the service sector, according to the Bank of Korea (BOK). The figure was $2.58 billion in 2022 and jumped 2.7 times to $7.04 billion the following year.

In the service sector, including royalty payments for intellectual property (IP), research and development (R&D) service, tourism, education and advertising, Korea has been relying excessively on the U.S.

For example, following COVID-19's transition to endemic in 2022, explosive demand for tourism and studying in the U.S. fueled the deficit, soaring over 120 percent to $1.72 billion in 2023 from $773 million the previous year.

The largest portion of the deficit comes from IP usage fees. Because of patents, copyright and technology software owned by U.S. tech giants such as Google, Apple, Microsoft, Meta and Qualcomm, the fees amounted to $3.44 billion in 2023, a 30 percent increase from the previous year. Business services like R&D projects and consulting also spiked to $3 billion in 2023 from $1.58 billion from a year earlier.

The BOK said in March that Korea’s current account balance in the knowledge-based service industry last year amounted to a $7.26 billion deficit overall. Over 77 percent, or $5.61 billion, came from trade with the U.S. led by R&D service, advertising or public relations services, and legal or accounting services.

This figure also increased 18.6 percent from a year earlier, showing the growing reliance on the United States. Korea's trade deficit with the U.S. is more than five times that of Germany's $1.06 billion, which is the second-highest, according to the central bank.

A security guard stands watch by the Meta sign outside the headquarters of Facebook's parent company, Meta Platforms, in Mountain View, Calif., Nov. 9, 2022. Reuters-Yonhap

However, the BOK said Korea’s overall trade deficit in the knowledge-based service industry has dropped from 2010 when it was $12.8 billion. Korea’s information communication technology industry and IP content industry have each seen an average annual growth of 15.6 percent and 16 percent, respectively, it added.

Experts said Washington did not take into account its upper hand in the service sector in bilateral trade. If Washington had factored this into its tariff rate calculations, they argue that the U.S. should have proposed an initial rate lower than 25 percent.

As the two countries still expect to negotiate further on trade, there is an opportunity for Korea to address its trade deficit in the service sector.

But experts are pessimistic about Korea’s ability to impose tariffs or set up nontariff barriers on U.S. service firms as a reciprocal measure, considering its geopolitical disadvantage compared to countries with larger economies and stronger diplomatic power.

“The European Union had planned to levy a digital service tax on American tech companies, as the continent was suffering from a deficit in its trade with the U.S. in the service sector. It is like a tariff,” said Kim Hyeok-jung from the Korea Institute for International Economic Policy in Sejong. The EU, in its trade with the U.S. in the service sector last year, saw a deficit of $58 billion.

The European Commission, however, dropped the tax in July.

“Trump has launched the ‘America First’ Policy and has tripped on the EU’s regulations on U.S. firms like the digital service tax. Now, the EU could have at least tried to jab at Washington with the regulation," Kim said. "But it would be difficult for Korea to do so, given the country is facing pressure to accept U.S. tech firms' request for greater access to the Korean market."

The Ministry of Trade, Industry and Energy, a pivotal authority in the country's latest tariff deal with the Trump administration, declined to comment on the issue.

Currently, the Korean government is reviewing Google's request for the country's precision map data, and is set to announce the outcome in the near future. The government said the request, along with other digital service regulations, was not included in the latest tariff deal.