During his confirmation hearing in March, then-United States trade representative nominee Bob Lighthizer made the case that bi-lateral trade deficits are an issue in that they may point to protection embedded in the trading regimes of America’s partners. The U.S. and South Korea are currently at an impasse over the Trump administration’s demand to renegotiate in the U.S.-Korea Free Trade Agreement (KORUS) essentially because South Korea is asking the trade representative to identify exactly how KORUS is contributing to problems with market access. Korea is not prepared to renegotiate simply on the basis that the U.S. side is unhappy with the trade balance. It is skeptical and wants an investigation done to substantiate the links.
The Koreans make a reasonable suggestion. Yet, it has been met with a threat from the Trump administration to unilaterally withdraw from the agreement. The administration’s response is wrong on several accounts.
First, the Koreans are right to be skeptical. As others have pointed out, the sectors most responsible for the deficit in goods are autos and electronics. KORUS has not yet kicked in on the former, and doesn’t touch the latter – as trade in electronics was already tariff-free. It also ignores the fact that the U.S. runs a surplus in the services trade. And it side steps overall weakness in the Korean economy that has hindered its imports on a global basis.
Two, except as Lighthizer pointed out in his testimony, deficits do not matter that much. When an economy is strong, it imports more. Besides, negotiating agreements solely with an aim of running a positive U.S. balance is unlikely to find many takers. Agreements have to produce wins for both sides. There is nothing inherently better about exports than imports. Most imports go into American manufacturing and create other options and competition that benefit consumers. In a global economy, you can’t determine winners and losers by looking at trade balances.
Three, termination of KORUS will hurt the United States. Korea is America’s seventh-largest export market for goods and our sixth-largest source of goods imports. Among some of the industries in the U.S. most worried about termination of the agreement are aerospace, agriculture – especially beef – and the services. These industries and the workers they employ will become direct casualties.
Fourth, there is an open question as to what authority the president has to pull out of this trade agreement or others without consent of Congress. KORUS is not literally a “treaty.” It is a Congressional-executive agreement that was enacted by both chambers of Congress through the legislative process. It is not clear that the executive branch has the unilateral constitutional power to overturn them. And there is considerable resistance to the idea in Congress.
Fifth, the Trump administration’s approach to KORUS is no way to treat an ally. If it wants to update KORUS, and even the staunchest proponents of KORUS would acknowledge that it could be improved, it should approach the Korean government respectfully. It should not try to squeeze it into a negotiation against its will – which in the end, will not be productive. South Korea has options. It trades twice as much today with China as with the U.S. That is not to say it does not value its trading relationship with the U.S., but that there is a broader international context that must be taken into account in our approach. Losses to the U.S. will become someone else’s gain.
Ambassador Lighthizer should heed the analysis that he himself gave to the Senate Finance Committee back in March. The South Koreans are not keen to renegotiate the agreement in any regard. (This would be the third time since the agreement was concluded in 2007 – each time at U.S. insistence – and the first time since it was passed and entered into force.) The suggestion of a study of the trade balance and its relationship to KORUS is reasonable middle ground. The U.S. should agree to it, and if the study identifies flaws beyond what can be fixed through better enforcement, move forward with an update of KORUS in a spirit of cooperation, friendship and alliance.