This is the second part of a two part series looking at the impact of the KORUS FTA on jobs in the United States. Part I can be found here.
By Troy Stangarone
In the first part of this series, we looked at how using trade surpluses or deficits in trade in goods might provide insight into how the KORUS FTA has performed in terms of jobs gained or lost in the United States. As we noted in that piece, estimates provided by EPI have overstated the impact of the KORUS FTA on jobs for multiple reasons. In this part, we’ll look at three additional factors to consider when thinking about the impact of the KORUS FTA on American jobs – trade in services, foreign direct investment, and items covered by the KORUS FTA.
Trade in Services
Services are an increasingly important part of international trade in terms of value and volume. However, they are left out of EPI’s estimates (and the administration’s) of the impact of the KORUS FTA on jobs, excluding more than 20 percent of U.S.-Korea trade. In addition to being a significant portion of U.S.-Korea trade, the United States has a surplus in services exports to Korea. Each additional $1 billion in services exports supported approximately 2,000 more jobs in 2015 than exports of goods according to data compiled by the U.S. Department of Commerce.
However, it should be noted that there are challenges in using services trade data. It tends to lag behind reports in goods data and it is more difficult to disaggregate the trade that is reflective of provisions covered by the KORUS FTA from those that are not, as we will do with goods later. Using yearly services trade data and Commerce estimates of jobs supported by services exports we can see that in 2015 services trade likely accounted for more than 18,000 jobs supported not accounted for by EPI’s estimates.
Foreign Direct Investment
Another important area of economic relations between the United States and Korea that is often overlooked in estimates of the impact of the KORUS FTA on jobs in the United States is how foreign direct investment (FDI) in the United States has changed since the agreement went into effect. Since the KORUS FTA came into effect, Korea’s level of FDI in the United States has doubled from $19.9 billion to $40.1 billion according to the Bureau for Economic Analysis. While statistics on jobs created from Korean FDI into the United States are only available through 2014, the number of Americans employed by Korean firms in the United States has grown by nearly 11,000.
In addition to supporting additional U.S. jobs, workers at Korean firms receive higher levels of compensation than the U.S. average and have seen an 11 percent growth in average compensation since the KORUS FTA came into effect. Average compensation at Korean firms rose from $81,851 in 2011 to $92,021 in 2014.
Judging the KORUS FTA by the KORUS FTA
One of the limitations of looking at the change in the United States’ merchandise trade deficit with Korea since the KORUS FTA’s implementation is that the overall trade deficit includes goods both covered and goods not covered by the agreement.
As we noted in Part I, the KORUS FTA has not been fully implemented. For example, the United States did not cut its tariff on imports of Korean automobiles until earlier this year. Between 2011, the year the KORUS FTA was implemented, and 2015 U.S. imports of automobiles from Korea with engines between 1500-3000 cc increased from $7.5 billion to $11.9 billion (by calendar year). The number of vehicles imported rose from 530,625 in 2011 to 793,333. Under the EPI method that $4.4 billion increase in imports of Korean autos contributes to the estimated job losses caused by the KORUS FTA even though the provisions relating to the agreement had not come into effect. In essence, by looking at the overall deficit figure the KORUS FTA is held responsible for shifts in trade that are market driven rather than related to the agreement.
If we look at the KORUS FTA from the perspective of beneficiary items and non-beneficiary items, a significantly different picture develops than the one presented by EPI. Beneficiary items are the goods that are covered by the agreement, while non-beneficiary items are those that are not covered or have not yet seen a cut in their tariffs. U.S.-Korea Connect, a website run by the Korean Embassy in Washington, DC, breaks out the U.S.-Korea merchandise trade by beneficiary and non-beneficiary items allowing us to utilize the EPI method to see what the impact on jobs would be based on beneficiary items only. In essence, to judge KORUS by what it actually covers.
However, there is one caveat that we should note. As the KORUS FTA is implemented, the composition of beneficiary items changes. For year-to-year comparisons this should be kept in mind. While U.S.-Korea Connect does not provide a baseline number, they do provide the percentage increase in the first year. By using this data we can determine the value of U.S. and Korean exports in the year prior to the KORUS FTA. The chart below shows the value of beneficiary exports and imports under the KORUS FTA, how the balance shifts over the years, and what the jobs picture would look like using the EPI method. As we can see from the data below, given the small surplus the U.S. enjoys among beneficiary items the KORUS FTA has likely created around 3,775 jobs. Similar to the EPI data, there have been revisions to the data on beneficiary items. Korean beneficiary item exports to the U.S. in the first year were eventually revised up by a little less than $1 billion. While a future revision could turn the positive job growth under this method negative, the job numbers would still be in line with the International Trade Commission’s initial estimate that the KORUS FTA would likely have a negligible impact on jobs, certainly not the 100,000 figure from EPI cited by Trump on the on the campaign trail.
A Caveat on the Numbers
One caveat about our own numbers. The data on jobs supported by FDI are only available on an annual basis, and for simplicity’s sake annual data was used for services trade as well. In contrast, EPI’s data is based on KORUS years, March 15 to March 14 of the following year. This means that the two sets of data are not quite comparable, but they do highlight the broader trend which is that when services and FDI are accounted for any negative impact on jobs in the United States is significantly reduced.
Of course, when one only looks at goods covered by KORUS, the job losses become a small job surplus, an additional caveat one should keep in mind.
What It All Means
The book and movie, Moneyball, made famous the Oakland A’s data driven approach to better understanding baseball. One of the key lessons from that experience is that better and greater amounts of data can provide a more complete picture. If we now know that on base percentage (OBP) is a better metric than batting average for understanding how a hitter is performing, there is no reason that we should not look at more complete data that better reflects the impact of trade agreements on the U.S. economy. Can we say for certain what the impact of the KORUS FTA on U.S. employment has been? No. As this two part series has demonstrated there are a series of factors to consider.
However, we can say that figures that only looking at the impact of the KORUS FTA in terms of the goods trade deficit or surplus are both incomplete and misleading. Interestingly, EPI would likely agree with this conclusion. When the Washington Post Fact Checker’s critiqued of Public Citizen’s analysis of the KORUS FTA’s impact on jobs, EPI responded to that critique by stating that “By ignoring imports, Kessler completely ignores one of the most important factors in the effects of trade on employment.” By not considering the impact of services, FDI, or looking at figures based on goods covered by the KORUS FTA rather than aggregate trade figures that include goods not covered by the agreement, we ignore “important factors” that help to define the overall impact on jobs.
Troy Stangarone is the Senior Director of Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.
Photo from James Mcdermott’s photostream on flickr Creative Commons.