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The Peninsula

The KORUS FTA and the Debate Over Trade Promotion Authority

Published February 10, 2014
Category: South Korea

By Troy Stangarone

In the ongoing debate over granting President Barack Obama Trade Promotion Authority (TPA), previously known as Fast Track, three Democratic members of Congress pointed to increased merchandise trade deficits with Korea after the implementation of the KORUS FTA as a reason to oppose a new grant of TPA. However, while the merchandise trade deficit with Korea has grown over the last year, this is an incomplete picture of both KORUS and the importance of a new grant of TPA.

According to the Census Bureau, the U.S. trade deficit with Korea for goods increased to $20.6 billion in 2013 from $16.6 billion in 2012, which is the highest trade deficit in goods recorded with Korea. The previous high being $20 billion in 2004, which increased from a deficit of $13.2 billion in 2003. After the surge in 2004, the goods deficit declined to $16.2 billion in 2005.

Looking at more detailed data on trade in goods from the Korea Customs service, the biggest reason for the increase in the goods trade deficit is that exports of U.S. non-beneficiary items to Korea have fell by 20.1 percent in the first three quarters of 2013 to $15.4 billion. In contrast, exports of U.S. goods whose tariffs have begun being implemented rose by 6.2 percent over the same period to $18.9 billion. At the same time, Korea has seen strong growth in its beneficiary exports to the United States, increasing by 9.7 percent in the first three quarters of 2013, with continued growth of its non-beneficiary items at 3.1 percent. As a result of a significant decline in the export of goods not currently covered by the KORUS FTA and relatively stronger growth for Korean exports to the United States currently covered by the KORUS FTA, we have seen a widening of the deficit with Korea on the goods side.

However, trade in goods only considers one aspect of the wider economic relationship between the United States and Korea. While the goods deficit has widened, the United States surplus in services trade with Korea has also grown. In the first three quarters of 2013, which is the most recent data available, exports of U.S. services to Korea were $15 billion, up from $14 billion in 2012. Over the same period, the United States surplus in services trade grew from $5 billion in 2012 to $6.3 billion in 2013. While exports of U.S. services to Korea increased by 7.6 percent, the United States surplus in services grew 25.7 percent. Full data on services trade in 2013 will not be available until later this year, but if it follows the trend in the chart below, we should expect the United States surplus in services to bring down the overall trade deficit with Korea by about $7-8 billion.

Quarterly U.S.-Korea Trade in Goods and Services

BEA Korea Trade Data

A third aspect of the economic relationship is investment. By this measure, the United States is also doing well. Investment from Korea to the United States through September was running $4.1 billion, ahead of U.S. investment into Korea at $2.7 billion.  This follows a similar trend from 2012 when Korean investment in the United States reached $6.9 billion, while U.S. investment in Korea was $3.7 billion.

There are a few other considerations to take into account when analyzing the impact of the KORUS FTA. First, of the more than $100 billion that the United States and Korea did in trade in 2013, more than $35 billion was still conducted outside of the FTA. Second, as can be seen in the year-to-year comparison of goods trade with Korea below, since September U.S. exports to Korea have been increasing at a more significant rate. In fact, the monthly merchandise trade deficit between the United States and Korea has declined by 62.4 percent from $2.1 billion in September to $789 million in December. At the same time, we are also beginning to see a gradual decrease in imports from Korea. Together, if these two trends hold, we could begin to see the deficit in goods begin to decline next year. Lastly, as can be seen in the graph above, since 2004 there has been a consistent increase U.S. service exports and the growth of the U.S. surplus in services trade with Korea.

U.S.-Korea Monthly Merchandise Trade

While the U.S. has not seen the overall benefits many had expected in the less than two years the KORUS FTA has been in effect, the picture is much more complex and potentially promising than critics looking only at one aspect of the economic relationship between Korea and the United States would argue. With some goods yet to see their initial tariff cuts and others with more cuts to come, we are still early in the process. With KORUS showing progress in both exports of beneficiary items and services, arguing that the agreement is a reason to not move forward on TPA so the United States can pursue the Trans-Pacific Partnership (TPP) or the Trans-Atlantic Trade and Investment Partnership (TTIP) would seem to be premature at best.

However, without a new grant of TPA, there would be clear costs the United States would have to consider. Without TPA, the administration will not be unable to conclude the TPP or the TTIP, which are regional agreements that will help to lay the foundations for future trade rules and that are estimated to be worth $600 billion globally, of which the United States is expected to reap $200 billion. It would also effectively undermine the most important aspect of the United States rebalance to Asia – the economic opening. To date, much of the rebalance has been military in nature. Without TPA, the administration would be unable to assure U.S. access to the most critical economic region of the coming decades and U.S. influence in the region would be undermined.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the authors alone.

Photo from Willem van Bergen’s photostream on flickr Creative Commons.

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