The future of the Korea-US Free Trade Agreement, or the KORUS FTA, is looking unclear. On August 22, the two sides sat at the negotiating table to discuss possible amendments to the free trade deal. However, the meeting ended without any agreements. The US is set on quickly beginning negotiations to amend the deal, while Korea believes any decision should be made through consensus. We will take a closer look at how future negotiations will unfold with Dr. Kim Hyung-joo of LG Economics’ Research Institute. First, let’s take a look at what the special session of the joint committee revealed about each side’s stance.
The US claims that the trade imbalance between the two sides is too large and, as it has been caused by the Korea-US Free Trade Agreement, the deal needs to be improved. Korea, on the other hand, says internal economic and cyclical factors in the US are bigger contributors rather than the FTA. The US also claims that both countries need to faithfully carry out the deal in order to reap the full benefits, but the Korean government and society did not do their part, which is blocking American products from being exported to Korea. The US claims the Korea-US Free Trade Agreement itself needs amendment and wants to begin negotiations as soon as possible, but Korea does not agree on this and wants the US to bring sufficient evidence to back up this claim.
This KORUS FTA Joint Committee was a special session that was held at the suggestion of the US Trade Representative to discuss trade imbalances. There was tension in the air even before the meeting began as both sides must agree to make amendments to a free trade agreement. After a marathon meeting that lasted eight hours, both sides were unable to reach an agreement and only confirmed their differences. The US claimed that the KORUS FTA was the reason behind its trade deficit with Korea, citing the need for an amendment or modification. However, Korea maintained its stance that the US trade deficit with Korea is not because of the KORUS FTA and suggested carrying out a joint study on the reasons. Seoul also made clear once again that any decision regarding the FTA is an agreement that was made by the two sides.
Towards the end of most meetings, participants usually discuss the time and place for the next round of talks. However, this time around the negotiators were unable to decide on the next meeting. The US trade representatives are expected to return home and discuss the next schedule internally before reporting back to the Korean side. According to a post uploaded on the USTR website right after the meeting, the US is strongly maintaining their stance and said they will address the trade imbalance problem between Korea and the US. This is why we expect discussions to continue between the two sides in the future. Also, as we discovered large differences in opinion between the two sides, analysts predict that future negotiations may be very rough.
The US side went back home after concluding the meeting on August 22, keeping Korea’s suggestion of a joint study on the effects of the KORUS FTA in mind. It is expected that the US representatives will take some time to organize their thoughts after realizing how much difference in opinion exists between the two sides on amending the trade pact. However, political factors such as the North Korean nuclear issue and THAAD may influence the negotiations. There are analysts who point out that Korea may have to prepare for the worst as US President Donald Trump even mentioned “terminating” the bilateral trade pact in February this year.
Korea has certainly benefitted from the trade pact. However, it’s not true to say the US suffered only losses from the FTA. There are industries that have benefitted from the deal. For example, the US services industry, legal industry, and some agricultural sectors have been benefitting from the deal. So, it would be difficult for the US to get rid of the deal all together, although it could put the option on the negotiating table. Rather than taking drastic measures such as terminating the deal, the US is more likely to connect the deal with other political and diplomatic issues.
Trade Minister Kim Hyun-chong spoke at a news conference right after the special session of the joint committee and said there was no mention of terminating the trade deal. He also emphasized that terminating the deal could bring immense economic losses for the US. The Wall Street Journal wrote that the Trump administration is demanding an amendment or termination of the Korea-US Trade Agreement, but a meaningful change will be difficult to achieve as opinions differ by industry. The US beef industry saw sales rise by 82% in Korea following the deal and it does not support any changes to the pact. On the other hand, exports of US automobiles to Korea last year were only worth 1.6 billion dollars, a mere 400 million dollar increase from before the deal was reached. The US steel industry is also demanding an amendment claiming the Korean steel industry’s oversupply is bringing down global steel prices. As such, observers are predicting that the differences in opinion will lead to just a few clauses of the Korea-US Free Trade Agreement being amended.
If a termination of the deal is the worst-case scenario, the deal being left unchanged is the best-case scenario for us. However, with the US President having made such comments, the US side cannot let the situation pass without doing anything. Then, as the second-best solution, we are hoping that some form of compromise would be possible, such as modifying the text of the agreement or adding a little annex to it. It doesn’t seem impossible as the US side has to receive Congressional approval and the procedure becomes extremely complicated for an amendment or renegotiation. That is why there is a chance the US will accept modifying the deal if we give them adequate reasons.
For Seoul, it may be advantageous to focus on amending or modifying parts of the deal. According to the Korea Economic Research Institute, if renegotiations for the KORUS FTA take place, export losses until 2021 will amount to as much as 17 billion dollars for Korea as renegotiation tariffs are placed on trade boom industries. As such, the challenge is on for Korea to find a way for the US to see that slight modifications to the deal will result in a win-win situation for both sides. This will take some time and result in a lengthy negotiation process.
It is difficult to predict whether negotiations to amend the FTA will continue or how many joint committee sessions like this will be held in the future. However, we can take the NAFTA amendment negotiations that the US is currently carrying out with Canada and Mexico into account. The talks began in the 2nd week of August and they agreed to meet seven times once every three weeks. This means they aim to conclude the talks within 2017. Wanting to finalize everything within this year means the US side could be taking domestic political events, such as next year’s midterm elections, into consideration. For us, putting out a counter offer by suggesting the inclusion of clauses on foreign exchange rates or intellectual property that the US has brought up at other FTA negotiations first could be a good strategy.
Korea has taken the first steps to negotiations on a possible amendment to the Korea-US Free Trade Agreement which could take up to a year. Korea should prepare thoroughly to straighten out the facts and find ways to increase the benefits for both sides.