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The Peninsula

Benefits of KORUS FTA Not Eclipsed by the Trade Deficit

Published August 21, 2017
Category: South Korea

By Donald Manzullo

When then-candidate Donald Trump first raised issues with the U.S.-Korea (KORUS) FTA in 2016, the United States had just seen its merchandise trade deficit with South Korea rise to a record $28 billion. As a candidate and president, Trump has placed an emphasis on the creation of U.S. jobs in the manufacturing sector and in reducing the U.S. trade deficit. However, much has changed since President Trump first raised his concerns about the KORUS FTA, which will be key for U.S. and South Korean trade negotiators as they prepare to meet at a session of the KORUS FTA’s Joint Committee.

As the United States and South Korea meet to discuss the free trade agreement, the United States is expected to raise its concern over the merchandise trade deficit and propose that the two countries consider amendments to the KORUS FTA to reduce the United States’ deficit. But while the original agreement was negotiated a decade ago and both sides should consider amendments to modernize the agreement to keep pace with changes in international trade, it is unclear that the FTA itself is responsible for the increase in the U.S. merchandise trade deficit with South Korea.

While the U.S. saw the deficit reach a peak in 2015, when Trump began his push against FTAs, the deficit actually declined slightly in 2016 to $27.7 and is down by nearly a third in 2017. This decrease in the U.S. merchandise deficit can be attributed to a significant growth in U.S. exports to South Korea, which began at the end of 2016, and a strong growth of 18 percent since 2011 in exports of U.S. goods covered by the agreement. Among these are exports of U.S. beef, which have risen to over $1 billion.

Since President Trump was elected, the United States has seen record levels of merchandise exports to South Korea in December, March, April, and May. Since the KORUS FTA was implemented, the majority of the growth in the deficit has come from trade in automobiles, but tariffs on imports of Korean automobiles were not eliminated until 2016. Yet, in the last year there have been fewer Korean automobiles imported into the United States.

Rather than being the cause of the U.S. merchandise deficit with South Korea, the KORUS FTA has helped to prevent the deficit from growing further. The U.S. International Trade Commission has estimated that without the KORUS FTA the U.S. trade deficit with South Korea would be $16 billion higher.

In addition, the FTA has benefited the United States in a variety of ways outside of keeping the trade deficit in check. The United States has seen strong exports of services to South Korea under the KORUS FTA, an area where the United States has a trade surplus. When the U.S. services exports are added to the $27.7 billion goods deficit, the overall deficit with South Korea drops to $17.6 billion. For every Korean who studies in the United States or visits, those are services exports that help to create jobs here. Last year, more than 61,000 Korean students studied in the United States, the 4th largest group behind China and India. Lastly, the United States has seen Korea foreign direct investment double, helping to support 47,000 U.S. jobs that earn an average compensation of $92,000.

As the United States and South Korea begin the process of reviewing the KORUS FTA, they should look for ways to expand access for producers of both countries. If there are still regulatory issues that are inhibiting the sale of U.S. autos, for example, the two sides should look for creative ways to ease those burdens so that the trading relationship remains a productive one for both parties. But they should also be leery of only judging the agreement’s success by the trade deficit. If the deficit were the only metric by which both parties judged the FTA only one would ever be able to see the agreement as a success. Instead, they should also keep in mind that the agreement has been a success for both countries and that market forces are already at work in reducing the trade deficit.

Donald Manzullo is President and CEO of Korea Economic Institute and former Member of U.S. Congress (1993-2013). The views expressed here are the author’s alone.

Photo from Saik Kim’s photostream on flickr Creative Commons.

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