Dark clouds are appearing over the Korean economy. South Korea and the U.S. have agreed to begin procedures to revise their free trade agreement or FTA, with the U.S. hinting at the possibility of imposing safeguard restrictions on Korean washing machines. Oh Jeong-geun, a professor of finance and information technology at Konkuk University, analyzes the backdrop for initiating revision negotiations of the five-year-old trade deal between South Korea and the U.S.
South Korea and the U.S. held the second special session of their joint committee in Washington on October 4, following the first one in August. During the latest session, the two sides agreed to discuss revisions to the bilateral trade agreement. Before that, South Korea didn’t really expect that the two countries would go as far as to begin amendment negotiations, but it turned out that Washington’s trade pressure was extremely strong. Based on the so-called “America-first policy” advocated by U.S. President Donald Trump, the U.S. puts top priority on creating jobs. Trump has reportedly instructed White House officials to scrap the Korea-U.S. FTA altogether. South Korea believed that it would be better to revise the deal rather than abolishing it.
During the recent trade meeting, Washington stressed a snowballing U.S. trade deficit with South Korea, while Seoul underlined that their FTA has contributed to increasing bilateral trade volume. But South Korea eventually agreed to begin the process of amending the trade pact, as it was faced with strong pressure from the U.S., with Trump even mentioning the possibility of terminating the deal. Attention turns to how the revision process may unfold.
The automotive and steel sectors are likely to be high on the agenda, as the U.S. blames them for the trade deficit. Moreover, the U.S. is expected to demand an abolishment of tariffs on American agricultural products imported by South Korea. If the negotiations deal with all these issues, we cannot rule out the possibility of a full revision, which requires parliamentary ratification and therefore takes a considerable amount of time. That would place a burden on both countries. I think the two sides may possibly adjust their respective demands to an appropriate level.
Among the nations which the U.S. has trade deficits with, Canada, Mexico and South Korea are the only ones that have signed an FTA with the U.S. For that reason, the U.S. is seeking to revamp the North American Free Trade Agreement with Mexico and Canada as well as the FTA with South Korea. The U.S. may push for a complete revision of the Korea-U.S. FTA, citing the need for an improvement in trade balance with South Korea and the problem of a trade barrier. In the case of a full revision, the U.S. is required to inform Congress on the revision 90 days before the start of negotiations. Given the procedures, some experts are saying that the revision will be focused on particular sectors, from which the U.S. has suffered deficits, including automobiles. Whatever the sectors may be, the revision is likely to hurt the Korean economy. Automobiles, in particular, are expected to be hit hard.
Korea’s outbound shipments of automobiles and auto parts to the U.S. amount to 22 billion US dollars annually. Thanks to the tariff-free benefits of the FTA, Korea has been able to export a significant amount of automobiles to the U.S. since the trade deal went into effect in 2012, with the auto sector posting the highest export growth. If tariffs are revived, however, Korean automobiles will be in the same position as those from Japan or other countries and therefore lose price competitiveness. Automobiles and auto parts will be hit the hardest.
South Korea’s auto exports to the U.S. increased 12.4 percent on average from 2012 to 2016. And last year, the U.S. abolished the 2.5 percent import duties on South Korean cars. Accordingly, Korean automobiles have had a competitive edge in terms of price, compared to their Japanese or European rivals. But if the terms of the FTA are restored to the level before the signing of the deal after the renegotiations, they will not be able to enjoy the current benefits. There are concerns that Korean steel products, which have already been under pressure from anti-dumping tariffs by the U.S., may suffer from even stricter measures after the revision. The Korea Economic Research Institute estimates that exports to the U.S. will decrease by up to 19 trillion won, or about 17 billion US dollars, in the next five years if tariffs on Korean cars and steel products are revised, costing 150-thousand jobs. Additionally, the U.S. is considering enforcing a safeguard on Korean washing machines, apart from the FTA.
The market share of washing machines made by Samsung and LG Electronics is rising in the U.S. market, while that of their U.S. counterpart Whirlpool is falling. Whirlpool filed a petition with the U.S. International Trade Commission to determine whether Korean washers are harming the U.S. industry. The commission has recently ruled in favor of Whirlpool to impose a safeguard, or emergency import restriction, on the two Korean electronics makers. The restrictions include a possible 40 percent tariff on Samsung and LG washers. If a whopping 40 percent tariff is imposed, it will be almost impossible for the Korean companies to export their washers to the U.S. The commission’s investigation will move to a public hearing and the U.S. president will be briefed on the result early next year. Before that, Korea needs to fully explain that Whirlpool’s declining market share was not necessarily caused by the advance of Samsung and LG washing machines to the U.S. market.
When the safeguard restrictions are activated, the U.S. government may either limit imports of Korean washers or implement a double-digit increase on the current 1 percent tariff. If that happens, damage is unavoidable for the two Korean firms, which are estimated to have shipped nearly 1 billion dollars worth of washing machines to the U.S. last year. To make matters worse, the washer dispute may prompt other American companies to take advantage of the Trump administration’s trade protectionism, mounting similar trade pressure on other areas as well. For South Korea, it seems more urgent than ever to find a new breakthrough.
It is necessary for South Korea to explain that the U.S. has not unilaterally suffered from losses since the Korea-U.S. FTA came into effect. American products are expanding their presence in the South Korean market and vice versa, meaning that the trade pact has been mutually beneficial. Also, Korea’s trade surplus in goods has increased but Korea has seen a deficit of 10 billion dollars in the services sector. Moreover, South Korean companies like Samsung Electronics, Hyundai Motor and Kia Motors are setting up factories in the U.S. to provide jobs to local workers. Given that, bilateral trade is not necessarily advantageous to only South Korea but highly beneficial for the U.S. as well. Korea should emphasize this aspect. The U.S. is putting economic pressure on South Korea because mutual trust is not very solid for now. South Korea may use the North Korean nuclear issue to restore confidence between Seoul and Washington and strengthen the bilateral alliance even further. South Korea will then hopefully win more economic concessions from the U.S.
South Korea must come up with an elaborate strategy to carry out its intention at the FTA renegotiations, which are currently an uneven playing field. It should also use the North Korean nuclear crisis as an opportunity to bolster the South Korea-U.S. alliance to eventually protect its national interests and minimize damage.