By Kyle Ferrier
Last week, the Office of the U.S. Trade Representative (USTR) released its Summary of Objectives for the NAFTA Renegotiation, providing a window into how the administration may pursue updating the U.S.-Korea Free Trade Agreement (KORUS FTA). Because USTR is taking a different approach on the North American Free Trade Agreement (NAFTA) than on KORUS, calling a special Joint Committee meeting under KORUS rules rather than formally triggering the renegotiation process, it is not required to release a similar document outlining negotiation objectives with Korea. Yet, the administration’s regular singling out of both trade deals and characterization of each set of new talks suggests USTR may have similar objectives on both. What then does the summary of objectives for NAFTA portend for KORUS?
The biggest takeaway is that the proposed changes are not as extensive as the administration’s rhetoric on trade would suggest. Although Donald Trump lambasted the Trans-Pacific Partnership (TPP) on the campaign trail and withdrew the U.S. from the deal on his third day in office, most of what USTR is looking to include in an updated NAFTA is either drawn directly from the TPP or generally congruent with the agreement. As such, Seoul should view renewed talks as an opportunity to update KORUS.
Apart from newer amendments on automobiles and beef, KORUS is 10 years old. Some chapters may be in more need of an update than others, particularly e-commerce, though both countries could benefit from revisiting all chapters to reflect more advanced rules. Mexico and Canada essentially went through this process with the U.S. for the TPP negotiations and will have to run the gamut again through the much older NAFTA, turning 23 this year. While Korea may not have been party to the TPP, in many ways KORUS was the foundation for the TPP and it has long been an observer of the deal. Seoul is well-acquainted with TPP rules and the domestic adjustments required to meet their stipulations, which should greatly facilitate discussions on KORUS.
In addition to upgrading the existing chapters, renewed talks could bring new chapters from the TPP to KORUS. The USTR document on NAFTA has separate sections on state-owned and controlled enterprises (SOEs), small- and medium-sized enterprises (SMEs), and good regulatory practices, all of which appeared as individual chapters for the first time in an FTA in the TPP. All three have potential benefits for the Korean economy, especially the SME chapter which seeks to make exporting easier for small companies, a perennial government priority. However, a currency chapter as suggested in the USTR document could be a sticking point.
Although the possible inclusion of currency manipulation provisions may be of concern to Seoul, the Trump administration is not likely to entirely give up on the issue. Addressing Washington’s concerns bilaterally through KORUS may even be a more acceptable venue. Korea is on the U.S. Treasury’s Monitoring List for currency manipulation, meeting two of the three thresholds of a manipulator. Trump’s threats to name China a currency manipulator earlier this year raised concerns that Treasury would alter its criteria, possibly naming Korea a manipulator in the process. Yet in its April report, Treasury largely followed the same methodology as was in previous reports and did not name any manipulators. Nevertheless, there is no guarantee that the next report due out in October would maintain the same criteria, particularly as Trump publicly tied not naming China a manipulator to its help with North Korea, which he seemingly no longer views as a viable policy option.
The USTR objective on currency in the NAFTA document does not offer any specifics, only suggesting that exchange rate manipulation would be avoided “through an appropriate mechanism.” However, if this section were to also follow the precedent set by TPP, USTR will likely ask Seoul to be more transparent in its official currency market interventions, an issue that has been repeatedly raised in Treasury’s international currency reports to Congress. In a 2015 Joint Declaration, TPP countries committed to avoiding currency manipulation as well as publicly reporting their foreign-exchange interventions. As public reporting of foreign-exchange interventions relates to the only Treasury criteria that Korea does not meet (i.e. repeated net purchases of foreign currency more than 2 percent of GDP over the previous 12 months), it may be in Korea’s best interest to be more transparent regardless of this issue arising in trade talks with the United States. Additionally, through KORUS talks, addressing currency manipulation and other contentious issues that might have made Korea hesitant to join the TPP could even help facilitate its accession to the agreement, for which there are convincing arguments.
Although USTR’s objectives for NAFTA largely suggest that the Joint Committee meeting will be used as an opportunity to update KORUS based on free trade principles, Korea should be cautious as well. Of high concern for Canada and Mexico is USTR’s objective to eliminate the Chapter 19 dispute settlement mechanism for trade remedies as well as eliminate the global safeguard exclusion for NAFTA countries outlined in Article 802. This would make it easier for the U.S. to apply more anti-dumping and countervailing duty measures against both countries and simultaneously more difficult for them to contest these measures. While there is no global safeguard exclusion in KORUS (Article 10.5 says imports “may” be excluded rather than “shall” in Article 802) nor does it go as far as NAFTA on dispute settlement (Article 10.7 does not create binational panels to resolve disputes as does Chapter 19), some are worried these specific objectives are how the Trump administration plans to advance protectionism. Others also expressed concern over the first objective, which states “Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries,” as a possible avenue to implement managed trade rather than free trade.
Though it is too early to definitively gauge how Joint Committee talks will proceed, there is reason enough for Korea to be cautiously optimistic about U.S. negotiating goals. Yet, Seoul would be wise to closely follow the NAFTA renegotiation, giving special attention to areas with the potential to promote protectionism and managed trade.
Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone.
Image from Michael Vadon’s photostream on flickr Creative Commons.