President Moon Jae-in and his US counterpart Donald Trump held their first bilateral summit last week. The two heads of state held talks at the White House on June 30, local time, and discussed various issues ranging from politics, diplomacy, and the economy as they reaffirmed the two nations’ strong alliance. However, the summit also revealed a number of contentious issues that needs to be solved, including Trump’s call for a renegotiation of the Korea-US Free Trade Agreement. Dr. Kim Hyung-joo of LG Economic Research Institute joins us for an in-depth look into the topics discussed at the two presidents’ first summit and the prospects of the two nation’s economies. First, he tells us about the major issues covered during the Moon-Trump summit.

The two presidents released a joint statement after their summit. Various economic-related issues were discussed at the talks. For example, fair trade, overcapacity, and non-tariff barriers were among the topics that were brought up. The joint statement, however, did not include such provocative issues. The problem is, while the bilateral FTA was not mentioned in the joint statement, Trump said to the press that the trade imbalance between the two countries is unfair, and called the Korea-US Free Trade Agreement a “rough deal” for the US. South Korean and American media are seeing his comments about the deal as an announcement for a renegotiation.

Moon and Trump affirmed their commitments to fostering expanded and balanced trade between the two countries in the joint statement released following their summit. The two also agreed to hold senior economic dialogues on economic growth and job creation. However, Trump was very vocal about the trade imbalance between the two allies during the summit. He noted that Washington’s trade deficit with Seoul has increased since the signing of the bilateral FTA in 2011, and pointed to the auto export barrier and steel dumping as major reasons behind the imbalance.

The auto industry is a sore spot for Americans. It’s one of their major industries, yet their growth of production is relatively slow. By contrast, European, Japanese and Korean carmakers are growing rapidly, hurting the Americans’ pride. It’s also hard to ignore that the market share of Korean cars in the US is on the rise. Steel poses a bigger problem. Small and medium-sized companies in Korea import steel from China and export to the US after manufacturing. From the US’s point of view, it’s unfair that Korea should buy cheap Chinese steel and sell it as Korean goods. In addition, Washington links Chinese goods with unfair trade, environmental damage, and labor exploitation, as well as unfair prices.

In fact, the White House said before the summit that the issues of trade imbalance and the KORUS FTA would be among the main topics at the summit talks. South Korea imported 60,099 American cars in 2016, logging a record high annual increase rate of 22.4 percent compared to the year before. Chinese steel exported to the US via Korea also only accounts for a mere 2 percent of all steel products Korea exports to the US. The fact that Washington is naming the auto and steel sectors as the reasons behind the trade deficit despite such figures hints that the possibility of a KORUS FTA renegotiation is indeed growing.

It appears that a renegotiation may be unavoidable. What remains to be seen is the scale of the renegotiation, as well as how much the US expects South Korea to concede. Scrapping the deal altogether or returning to square one could actually worsen the situation for the US. Aside from finished goods such as cars, Korea also exports a large amount of consumer durables and intermediary goods such as auto parts, semiconductors, and home appliances. Without Korean exports, the US manufacturing sector would be dealt a huge blow, and lead to a further reduction in jobs. So while a renegotiation of the Korea-US Free Trade Agreement may be carried out with much commotion, the resulting changes are not expected to be very big.

Since it came into effect 5 years ago, the Korea-US FTA has been mutually beneficial to both sides, increasing bilateral trade by an average of 1.7 percent each year. Korea’s exports to the US reached 66.5 billion dollars in 2016, up 8.2 percent compared to 2011, before the trade pact went into effect. The US may have suffered a trade deficit, but Korean investments in the US soared from 7 billion dollars in 2012 to 18 billion dollars in 2016. American service account surplus also increased from 11 billion dollars in 2011 to 14.1 billion dollars in 2015. Moreover, an FTA renegotiation requires bilateral agreement, meaning that it cannot be launched unless Korea agrees to it. In regards to this, the South Korean presidential office Cheongwadae issued an official statement following the summit that a renegotiation of the FTA deal had not been a part of the summit agreement. However, as Trump has practically made it official that the FTA is up for renegotiation, proper measures must be prepared.

The US has trade deficits with not just Korea, but with many other countries including Germany, China, and Mexico. The trade deficits are a big problem for the country, and while it is clear that something needs to be done, they have yet to decide on how to tackle the problem. So instead of revealing our hand, Korean officials are studying the US renegotiation of the North American Free Trade Agreement with Canada and Mexico, as well as watching closely the US-China 100 Day Action Plan on how to solve the bilateral trade imbalance problem. It would be ideal for Korea to wait for the results of these talks before entering renegotiations, so strategies are needed to buy some time.

If a renegotiation of the Korea-US FTA takes place, it will take a long time before a final agreement can be reached, as Korea too would demand improvements in the sectors it’s losing money on, such as the investment and service markets. Washington is also creating a new FTA model by renegotiating NAFTA with Canada and Mexico. Korea should closely watch this process and use it as a means to upgrade the Korea-US FTA. Already, Korean companies that visited Washington with President Moon have made promises of investment and purchases in the US.

Korean firms’ investments in the US generally create more jobs than those of other countries. For example, investment plans made by foreign companies such as Toyota and Softbank show that about 100 to 150 jobs will be created per 100 million dollars in investment. By contrast, Korean manufacturers like LG Electronics, Samsung, and Hyundai Motors created about 200 to 250 jobs per 100 million dollars invested. As a way to solve the trade imbalance problem, it would be more beneficial for both parties to increase US exports to Korea, rather than decreasing Korea’s exports to the US. If possible, importing gas or crude oil from the US, in addition to the Middle East where Korea usually imports those resources from, may be of great help in relieving political pressures.

South Korean companies plan to jointly invest 12.8 billion dollars in the United States over the next five years, and import 22.4 billion dollars’ worth of goods. The Korean firms’ investment plans are worth nearly 40 trillion won and are expected to help relieve some trade tension. In addition, if Seoul and Washington can start to form a stronger economic alliance based on the latest summit, the two countries may be able to welcome a new era of economic cooperation that goes beyond the FTA.