There are growing concerns over the different voices of the two heads of the United States and South Korea with the North Korean threat escalating.
“South Korea is finding, as I have told them, that their talk of appeasement with North Korea will not work.” US President Donald Trump twitted on September 2 (local time). At the same time, the U.S. President did not forget looking to scrap the Korea-US free trade agreement(or KORUS FTA).
The South Korean government is still adhering to dialogue and appeasement in spite of the North’s sixth nuclear test on September 3. After the test, the South Korean government adjusted its threshold from denuclearization to a nuclear freeze and no ICBM with a nuclear warhead. On the contrary, the U.S. President said, “We’ll see,” on potentially attacking North Korea.
In addition, the U.S. government is considering secondary boycott on China for its trade with the North. This means the U.S. is going to put significant pressure on China, the biggest trade partner of North Korea, even if a trade war follows.
Chinese Foreign Minister Wang Yi urged Pyongyang to return to the negotiating table while denying the possibility of additional sanctions on it. The U.S. is currently urging China to stop exporting its crude oil to the North, but China is refusing to do so.
Experts are warning that South Korea may fail to raise its voice in the power game between the two superpowers if it gets stuck in the frame built by North Korean leader Kim Jong-un.
Trump Says the Scraping ‘Very Much in My Mind’
Under the circumstances, Trump told reporters on September 2 (local time) that he would discuss whether to break the Korea-US FTA this week. "It is very much on my mind," President Trump said, answering to reporters when they asked President Trump whether or not questions of if he will discuss the matter starting this week.
President Trump's remarks virtually confirmed a report of the Washington Post (WP) that "Trump ordered his aides to withdraw from the Korea-US FTA." "The president instructed his aides to prepare the withdrawal of the FTA with South Korea," the WP quoted sources familiar with the issue as saying.
“Economic tensions can be ratcheted up between South Korea and the US facing the North Korean nuclear issue,” the WP reported.
According to the WP, even though there is a possibility that President Trump will negotiate an amendment to the Korea-US FTA while maintaining the agreement, internally, they made much progress in the preparation and may start to withdraw from the agreement as early as the second week of September (Korean standard time).
But some experts say that President Trump's remarks are highly likely to be a "bluff" in order to secure an advantage in negotiations on an amendment to the Korea-US FTA.
It is said that many of Trump administration officials, including national security adviser Herbert McMaster, defense secretary James Mattis, and Gary Cohn, chief economic advisor to President Trump and director of the National Economic Council are opposed to going back on the Korea-US FTA.
On the other hand, "The Korean government will respond calmly and dignifiedly without riding an emotional rollercoaster with respect to President Trump's remarks regarding foreign news that the US President Trump set directions of the debate on the abolishment of the Korea-US Free Trade Agreement,” said the Korean Ministry of Trade, Industry and Energy (MOTIE) on September 3. “The government has constantly announced its stance on the KORUS FTA negotiations for national interest and national dignity,” said an MOTIE official after hearing news about President Trump's remarks on the Korea-US FTA.
What Impact in Case of Scraping?
As news traveled that President Trump mentioned the abandonment of the Korea-US FTA, South Korean people are paying a lot of attention to how much the abolition of the agreement will affect the economies of Korea and the US.
The Korea Economic Research Institute of America said in April that if the tariff rate is revised again, Korea will suffer a maximum export loss of US$17 billion in three fields -- automobile, machinery and steel -- for the next five years.
With reference to this, the Hyundai Economic Research Institute in January predicted that if the Korea-US FTA is scrapped, exports will decrease by US$13.1 billion over the next four years until 2020, and 127,000 jobs will vanish.
However, there is analysis that if the KORUS FTA is scratched off, damage to the United States will eclipse damage to Korea because the bilateral trade structure is complementary. This is because if the agreement goes down the drain, US companies exporting products to Korea will have to pay a higher tariff rate on average than their Korean companies exporting products to the US.
If and when the FTA comes to and, both countries will be subject to MFN tariff rates in accordance with World Trade Organization (WTO) rules. According to a June report released by the Korea Institute for Industrial Economics and Trade, Korea’s tariff rate for US goods was 1.6 percent, while the US’s tariff rate for Korean products at least 4 percent.
The report predicts that if the agreement is terminated, US exports to Korea will decline more sharply than Korean exports to the US for this reason.
In Korea’s export and import structure in 2015, the abolishment of the Korea-US FTA will make Korea's exports to the United States decline by US$1.32 billion while pulling down Korea’s imports from the US to US$1.58 billion.
However, a decrease in trade between the two countries will lead to a decrease in consumer welfare and gross output, which is expected to eventually have a negative impact on both economies.
On top of that, some argue that since Korea's major exports concentrate on items in which the US has weak export competitiveness, the dismantlement of the Korea-US FTA will have a limited impact on Korea's import and export.
American Industries Oppose Trump’s Pressure
President Trump reduced his pressure on the Korea-US FTA and the South Korean government, after US industries expressed a series of opposition to his driving. According to industry experts, their opposition is because they might lose the import market of South Korea, which ranks 13th in the world in terms of GDP, and new tariff barriers can lead to an increase in consumer prices in the structure of trade in which they produce finished products by importing intermediate goods from South Korea.
According to the United States International Trade Commission, the tariffs the U.S. imposed on South Korean petrochemical products last year had an average rate of 0.6%. According to the Korea Institute for Industrial Economics & Trade, the average rate would have amounted to 3.2% without the Korea-US FTA and the rate would have tripled to 0.6% without the FTA when it comes to steel products. This implies the free trade agreement contributed to the cost competitiveness of American companies supplying their products based on intermediate goods imported from South Korea.
According to the Korea Automobile Manufacturers Association, GM Korea’s annual exports to the U.S. stood at 18,000 cars in 2011 and 28,000 in 2012 but jumped to 162,000 last year. In other words, its annual exports to the U.S. increased approximately 800% through the implementation of the Korea-US FTA. During the same period, Hyundai Motor Company and Kia Motors increased their exports to the U.S. by merely 21% and 13%, respectively.
When the Korea-US FTA took effect six years ago, the car exports from the U.S. to South Korea totaled only US$381 million. However, the volume amounted to US$1.739 billion last year and the average growth rate amounted to 35.5% between the two years. During the period, the car exports from South Korea to the United States showed an average annual growth of 12.4%.
Last year, the U.S. exported agricultural and livestock products worth a total of US$6.872 billion to South Korea to post a surplus of US$6.166 billion in these primary industry sectors alone. The export volume included US$1.035 billion in beef exports, US$832 million in corn exports, US$615 million in composite food preparations exports and US$393 million in pork exports. Likewise, the U.S. gained a net profit of US$14.1 billion in 2015 in its trade with the service sector of South Korea.
“Withdrawal of the U.S. from the KORUS FTA is likely to result in substantial losses on the part of its agricultural market, legal market and so on as well as American companies procuring intermediate goods from South Korea,” Kim Young-Gui, a researcher at the Korea Institute for International Economic Policy (KIEP) commented, adding, “This is why more and more people in the U.S. itself are warning against it.
Warnings from Experts in US
Experts in US-based think tanks also pointed out one after another that not only is US President Donald Trump’s threatening to abandon the Korea-US FTA inadequate in the current situation but help North Korea easily reach its goal of undermining Korea-US relationships.
"North Korea is trying to make the US and South Korea hate each other," said Jon Wolfstahl, a former special assistant to the US President for national security and a senior director for nonproliferation and arms control at the National Security Council in the Obama administration and currently a research fellow at Harvard University's Belfer Center in an interview with the Wall Street Journal (WSJ) on September 3 (local time). “Scrapping the Korea-US FTA will help Kim Jong-un reach the goal more easily. Now is the worst time to wage economic war with a close ally."
"If President Trump unilaterally abrogates the Korea-US FTA, the two countries’ partnership will be undermined," said Troy Stangarone, a researcher at the Korea Economic Research Institute of America in Washington, DC. Stangarone also ran down President Trump, saying "President Trump seems to treat allies worse than the enemy of the United States."
USTR Prefers Amendment to Scrapping
According to Financial Times on September 5 (local time), responding to a question on the future of the Korea-US FTA at a press conference in Mexico City on the same day, USTR representative Lighthizer said, "South Korea and the US are negotiating and we are hoping for some amendments to the agreement,"
Earlier, at the request of the USTR, the Korean side had hosted a special session of the Joint Korea-US FTA Committee to determine whether or not to start negotiations to revise the contents of the Korea-US FTA but failed to reach a conclusion.
Lighthizer seems to have suggested revision negotiations rather than one-way dismantlement by the United States. The USTR called for "amendments and modifications" last month, too, pointing to "burdensome regulations" that often block US companies’ business and set artificial prices on US intellectual property rights in relation to the Korea-US FTA.
However, some experts point out that it is difficult to see through President Trump and his administration since Lighthizer asserted, "I do not want to give details" immediately after this remark. Instead, he said, "We hope that when we are put to work, we will have a successful discussion with the Korean side and that problems in the FTA will be well addressed and solved in favor of us.
Lighthizer is currently visiting Mexico to discuss a second amendment to the North American Free Trade Agreement (NAFTA).
Possibility of Touching Volatile Sector
The inside U.S. Trade reported on September 4 that the United States demanded the opening of the South Korean agricultural market on August 22 at the two countries’ joint committee meeting concerning the Korea-US FTA, claiming that the elimination of the tariffs it imposes on agricultural products imported from South Korea should be postponed by five to 10 years from the deadline stipulated in the free trade agreement.
When the Korea-US FTA was signed, the South Korean government excluded the 16 sensitive items including rice from the list of concession items. It maintained the previous tariffs when it comes to items likely to be significantly affected by complete tariff elimination, providing certain tariff rate quotas or imposing seasonal tariffs. Immediate tariff elimination was applied to 578 items and tariff elimination over a period of two to 20 years was applied to the remaining 1,499 items with the implementation of the FTA in 2011.
At present, tariffs on 545 items are estimated to still remain. It is the immediate elimination of the tariffs on these items that the U.S. demanded last month.
Those items include beef, which was planned to become tariff-free over a period of 15 years. Last year, South Korea imported U.S. beef worth a total of US$1.035 billion. During the first five months of this year, the share of U.S. beef in the South Korean import market rose to 48.4% and exceeded that of Australian beef by 5.6 percentage points.
Tariffs still remain on such items as cheese, butter, sugar, chicken, garlic, pears and apples, too. The U.S. mentioned nothing about rice at the meeting though. This may be because it learned during the negotiations that rice is the most sensitive item on South Korea’s part. Nonetheless, rice can be called into question at any time as it is a tool the U.S. can use to enhance its bargaining power.
The United States, in the meantime, eliminated its tariffs on 1,065 items immediately after the KORUS FTA took effect. Those on 337 items were scheduled to be eliminated over at least six years. The U.S. told at the meeting that it needs five to 10 more years to eliminate the tariffs on these 337 items.
It is said that the U.S. demanded the opening of the market because it is an effective way of reducing its trade deficit while being supported by local industries. Import regulations, on the contrary, may be criticized by consumers and industries requiring imported consumer goods and raw materials.
As far as the agricultural industry is concerned, the United States has more competitive products than South Korea. In addition, the U.S. agricultural industry is the very sector where the U.S. has benefited the most from the Korea-US FTA. It is in this context that the National Cattlemen's Beef Association, the North American Meat Institute and the U.S. Meat Export Federation sent a letter to the U.S. government on August 22 to ask it to maintain the FTA as it is.
According to the Ministry of Agriculture, Food & Rural Affairs, South Korea’s agricultural and livestock product exports to the United States stood at US$716 million last year while its agricultural and livestock product imports from the U.S. amounted to US$6.852 billion to cause a deficit of no less than US$6.136 billion.
In the meantime, it is said that the South Korean government will respond calmly to various scenarios, including the dismantlement of the agreement. "With all possibilities considered, we have been preparing for the revision of the FTA,” said Kim Hyun-jong, the deputy chief negotiator for the trade negotiations after wrapping up a Joint Korea-US FTA Commission meeting on August 22. "I will negotiate with the US side in a dignified manner in the future. The term termination was not mentioned in the meeting."
In the meantime, if the US government kicks off the process of dismantling the Korea-US FTA, it should inform South Korea of its intention to terminate the agreement in writing. According to the agreement (Article 24), the Korea-US FTA is terminated 180 days after a written notice of termination from either party.
If the Korean government does not raise any problems, the agreement will be automatically discarded. The Korean side may request consultation within 30 days from the date of a written notice, in this case, the two countries ought to open a negotiation within 30 days from the date of the request.