Revised KORUS FTA Signed, Yet Tariff Risks Still Remain

The trade ministers of South Korea and the United States have signed the revised KORUS FTA, which will take effect after parliamentary ratification in each country.

Trade Minister Kim Hyun-chong and USTR Robert Lighthizer signed the revised agreement in New York on September 24 (local time). According to the South Korean government, the signing is expected to lead to much less uncertainties in the two countries’ bilateral trade.

“With a large number of trade disputes going on, the signing has a significant meaning in that the revised KORUS FTA is the first trade agreement concluded and signed under the Donald Trump administration,” said the South Korean trade minister.

At present, the Donald Trump administration is increasing pressure on many trade partners. When it comes to the revised NAFTA the U.S. and Mexico concluded last month, Mexico is regarded as having surrendered. In addition, the U.S. already declared that it could exclude Canada from the agreement. The U.S. is currently demanding the EU’s concessions as well and experts are saying that Japan can be the next target.
 

Through the recent negotiations, South Korea succeeded in limiting ISDS-based litigation. The Investor-state dispute settlement (ISDS) is to allow an investor investing in a foreign country to file a suit when the investor’s profit is affected by the country’s policy. A number of investors have abused the ISDS so far in order to obtain state compensations as seen in the case of American private equity fund Lone Star, which filed a suit with regard to a delayed sale of Korea Exchange Bank and taxation based on the investment treaty of South Korea and Belgium. Under the new rules, however, Lone Star cannot refile a suit based on the KORUS FTA.

According to the new agreement, the presence or absence of discrimination is determined in view of whether certain government policy is for public welfare such as environmental protection and protection of small firms when a foreign company files a lawsuit based on the clause stipulating that government policy should not discriminate against foreign companies.

In addition to the ISDS revision, transparency has been enhanced regarding U.S. import restrictions on South Korean steel and so on such as excessive anti-dumping and countervailing duty rates. According to the agreement, how the rates are calculated should be made public and on-site verification dates should be notified in advance for all verifications for tariff imposition.
 

In the automobile industry, the initial elimination of the 25% tariff on South Korean pickup trucks to be exported to the U.S. has been postponed from 2021 to 2041. According to industry sources, this effectively means South Korea cannot export pickup trucks to the U.S.

The Health Insurance Review & Assessment Service’s new drug pricing scheme is scheduled to be revised in compliance with the new KORUS FTA, too. The revision is likely to result in an increase in medical expenses attributable to an increase in the prices of foreign new drugs although its impact on South Korean pharmaceutical companies is expected to be rather limited because they export few drugs to the U.S. and the revision focuses on new drugs.
 

The revision of the agreement does not mean South Korea is now completely free from U.S. trade pressure. This is because the new agreement does not handle exemption from Section 232 of the Trade Expansion Act of 1962. In this regard, President Moon Jae-in asked the U.S. on September 24 to exempt South Korean cars from the section. However, the U.S. can apply the section to South Korean cars at any time regardless of the revision.