On January 23, U.S. President Donald Trump signed a set of safeguard measures against imported solar cells and washing machines, which are one of the major export items of South Korea. Safeguard measures can be issued when there is a sudden surge in imports and subsequent damage to a country’s local industry. The measures include import restrictions and higher tariffs. The U.S. has issued such safeguard measures for the first time in 16 years since 2002. Here is Dr. Kim Hyung-ju at the LG Economic Research Institute with his analysis of the implications of the U.S. government’s safeguard action.

The trade authorities in the U.S. have begun to take direct action to protect local industries, not being conscious of the eyes of other countries. Safeguard action is one of the representative tariff measures which have almost disappeared since the launch of the World Trade Organization. Part of non-tariff measures such as technical barriers to trade and quarantine have remained. But the U.S. has revived safeguard measures as a drastic means of restricting imports. The move is considered a step backward for the free and open trade system, which is feared to go back to the past.

Trump’s “America-first policy” explains his decision to impose heavy tariffs on imported washing machines and solar products, including those from South Korea. Entering his second year in office, Trump is pushing for trade protectionism in earnest. In fact, the U.S. International Trade Commission, or ITC, recommended imposing no tariffs or a 20-percent tariff on imported washing machines that do not exceed 1.2 million units. But Trump chose a tougher option. Accordingly, washing machine imports from South Korea will be restricted to an annual quota of 1.2 million units. On any number beyond that quota, a 50-percent, 45-percent and 40-percent tariff will be imposed over the next three years, respectively. Even products within the quota will be slapped with a 20-percent tariff in the first year. The rate falls to 18 percent in the second year and 16 percent in the third year. The measure will inevitably deal a blow to South Korean companies.

It is estimated that 2.5 million to 3 million units of washing machines from South Korean brands enter the U.S. market each year. Among them, a 20-percent tariff will be applied on the first 1.2 million washing machines in the first year. It will result in a rise in product prices and decreasing market share, with South Korean manufacturers suffering from declining sales and profits. More seriously, an estimated 1.3 million to 1.7 million washing machines that exceed the quota will face a whopping 50-percent tariff. In this situation, Korean companies only have two choices— lowering the prices and giving up profits or making super excellent products that would not be influenced by prices. It is difficult to make the second choice for now, so Korean firms will inevitably see their profits plummeting in the U.S. market.

At present, washing machines made by Samsung and LG are subject to 0.3 percent or 1 percent tariffs in the U.S. due to the Korea-U.S. free trade agreement. But if the tariffs rise to 20 or 50 percent as a result of the safeguard measures, South Korea will see a decline in its washing machine exports, which amount to 1 billion US dollars annually. The Korean solar cell industry will also be hit hard by the measures. Korean companies such as Hanwha Q Cells and LG Electronics exported 1.2 billion dollars worth of solar cells to the U.S. in 2016. For imports of solar cells and modules, the U.S. government will impose no tariffs on products below 2.5 gigawatts, but for those above that, the tariff will be 30 percent in the first year, 25 percent in the second year and 20 percent in the third year. On a more depressing note, the U.S. is strengthening its trade pressure.

The enforcement of safeguard measures results from U.S. companies’ petitions. That means other U.S. firms, including manufacturers of steel products and semiconductors, can also file safeguard petitions. In fact, companies in South Korea and the U.S. should be exempt from safeguard measures in accordance with preferential treatment under the bilateral FTA. Previously, the U.S. said that it would be appropriate to waive the quota of 1.2 million units of washing machines produced in South Korea, although it could be applied to South Korean washing machines produced overseas like in Thailand and Vietnam. But Trump didn’t agree with that. In other words, the U.S. government will implement the safeguard measures in a rather strict way, and the Korea-U.S. FTA doesn’t seem to be playing a role in protecting against safeguard measures. For that reason, experts even in South Korea may question the usefulness of the FTA.

The U.S. has so far criticized South Korea for dumping its steel products in the U.S. on the back of government subsidies and excess production. In regards to South Korea’s key export item of semiconductors, the ITC decided on January 19 to investigate some providers of solid state drives or SSD, including Samsung Electronics and SK Hynix, to determine whether they violated tariff laws. A solid state drive refers to a high-capacity storage device that is replacing the traditional hard disk drive. Samsung Electronics is a top player, accounting for 30 percent of the global SSD market. On January 24, the South Korean government formally requested bilateral discussions with the U.S. Trade Representative on a decision to impose safeguards on washing machines and solar cells. The request was based on Article 12.3 of the World Trade Organization(WTO) Agreement on Safeguards. During the proposed discussions, South Korea plans to request the U.S. to ease or withdraw its major safeguard content and to provide suitable compensation. Taking a step further, South Korea could file a petition to WTO against the U.S. decision. But the prospects are not very bright.

The WTO generally has very conservative views on safeguard measures since it advocates trade liberalization. Moreover, there is little evidence to support the claim that South Korean washing machines had a direct impact on American products, including those made by Whirlpool. So Korea is likely to win a suit against Washington’s decision on import restrictions on washing machines. But it will take more than two or three years. During that period, it is quite predictable that the South Korean washing machine market share in the U.S. will decline. In a worst-case scenario, the U.S. might officially declare its withdrawal from the WTO. If that happens, filing a petition to the WTO will be useless, and South Korea will be in a very disadvantageous position.

As you just heard, South Korea may win the suit, but the process will take too long. Plus, the U.S. may not follow through on the WTO’s decision properly. How can South Korea overcome this safeguard crisis?

Countries affected by safeguard measures, like South Korea, may impose retaliatory tariffs. For example, South Korea could slap retaliatory tariffs on American products exported to Korea to offset the damage on Korean companies to some extent. But the move will only cause more damage to consumers in both countries. It seems necessary for South Korea to put more diverse pressure on the U.S. through multinational discussions at the WTO, G20 or OECD. It could also work together with Japan and China, which are in a similar situation to South Korea, to pressure the U.S. to cooperate.

Washington’s first safeguard measures in 16 years may signal a full-fledged trade war. It is necessary to devise a long-term policy to cope with the situation. South Korea should actively join the international move to challenge the U.S.’ unfair trade practices, while making efforts to diversify its export destinations and further enhance product competitiveness.