24 September 2018
Originally published by Cato Institute.
Several weeks ago, the United States and Korea reached an “agreement in principle” on an amended Korea-US Free Trade Agreement (KORUS FTA). This amendment process was minor enough that the Trump administration believed it could undertake it without having Congress vote on the changes (there will be a consultation with Congress on some tariff changes, as described here). Congress could object, as it does have the ultimate constitutional power over trade, but so far there are no signs that it plans to do so.
In an op-ed on the new KORUS, we described the result as follows: “the KORUS renegotiation looks like a minor tweak to U.S. trade relationships, rather than the wholesale ‘populist’ revolution that is sometimes indicated by Trump’s tweets.” In this blog post, we offer a more detailed assessment of the KORUS changes that have been reported so far.
However, keep in mind that there is no final text of the amended agreement yet, so our analysis is necessarily a bit tentative. Specific wording can be important to understanding the implications of a provision, and there may be additional items that have not been reported yet. (In addition, statements by President Trump suggest the deal may be held up by other issues).
The outcomes of KORUS 2.0 can be grouped into two categories: (1) new issues that were not covered by the existing KORUS, and were negotiated as something akin to side deals to the talks, and (2) amendments or modifications to the current text. We examine each in turn.
With regard to the side deals, the biggest (and most negative) economic impact will arise from the export restrictions on steel that Korea agreed to. Pursuant to these restrictions, Korea would cap steel exports to the U.S. at 70 percent of the average volume from the past three years on a product-by-product basis. This was in exchange for a permanent exemption of the Trump administration’s Section 232 “national security” tariffs on steel. The impact of these quotas/tariffs will be some degree of price increase for U.S. consumers, with the amount of the increase depending on exactly how the measures are implemented. In terms of the impact on Korea, Korean producers may actually benefit, now that they have avoided the tariffs. Their sales to the U.S. will now be at higher prices, and they may find other markets for their steel to replace the lost volume in the U.S.
There are also provisions on currency manipulation. Media reporting on the currency provisions suggests they are non-binding. It sounds like the provisions are similar to those agreed to in a side letter to the Trans Pacific Partnership (TPP). Adding these currency provisions is not particularly significant, as the Trump administration is mostly just carrying over an Obama-era policy. However, the Trump administration may be pushing for binding currency provisions as part of the renegotiated NAFTA. This would be a bigger deal, as there have never been such detailed provisions on this issue in trade agreements, and U.S. attempts to promote such provisions in additional agreements would have significant implications. The specific terms will be important for determining the impact.
Turning to the amendments and modifications to the existing KORUS, the outcomes on automobile exports and truck imports stand out.
Under the existing KORUS, U.S.-based auto manufacturers can export up to 25,000 vehicles (per manufacturer) to Korea per year that will be deemed compliant with Korean safety standards simply by meeting U.S. standards. Through the renegotiation, this quota has now been increased to 50,000 vehicles per manufacturer. On its face, this is a good market-opening provision, and a positive development for increasing access to the Korean market. However, the real economic value is not clear. In 2017, U.S. passenger vehicle and light truck exports to Korea totaled only 52,607 units. Ford and General Motors shipped fewer than 10,000 vehicles each. Given the low volume of U.S. exports in these products, increasing the quota may not have much impact. (And to put these figures in perspective, Canada leads the way as a destination for U.S. exports with 912,277 units, and China is second at 267,473 units.)
With regard to light trucks, it appears that the administration took a more protectionist tack, extending until 2041 a 25% U.S. tariff that was supposed to be phased out by 2021. While there will be no immediate impact, because Korea does not currently export trucks to the U.S., this change could delay any future export plans. It has been suggested that the reason Korea has not yet sold light trucks on the U.S. market is because the existing tariff has effectively blocked the possibility of exports. In an interview with CNBC, USTR Robert Lighthizer said: “The Koreans don’t ship trucks to the United States right now and the reason they don’t is because of this tariff,” and “They were going to start next year – we would have seen massive truck shipments. So, that’s put off for two decades.” This modification can therefore be seen as an attempt by the Trump administration to prevent trucks produced in Korea from being sold in the United States. However, even if the tariff had been removed as scheduled, any trucks produced for the U.S. market after 2021 may very well have been produced in the Korean companies’ existing North American factories. As a result, the claim that “massive truck shipments” have been blocked is a bit misleading.
Other reported KORUS renegotiation results sound minor, although, again, a full assessment will have to wait for the release of the text. For instance, there appears to be a new agreement on environmental testing standards for autos. This could refer to Korea’s Fuel Economy and Greenhouse Gas Standards, which are updated every five years by the Korean Ministry of Environment. Through the negotiations, Korea has agreed to base the update of these standards for the 2021-2025 period on “global trends, including U.S. standards” and increase the number of eco-innovation credits available for auto imports to meet the fuel economy and greenhouse gas requirements. In addition, there was an agreement on harmonizing the testing requirements on gasoline engine vehicle exports so that these products will not have to be tested twice. As a result, U.S. emissions testing will be seen as equivalent to Korean testing requirements.
And Korea agreed to include American companies in a “national drug reimbursement program,” which offers premium pricing for certain new drugs. This change has been pushed by the Pharmaceutical Research and Manufacturers of America (PhRMA), which has argued that U.S. companies have been negatively affected by Korea’s low drug prices.
In addition to these changes, vague announcements were made with regard to introducing more transparency to certain dispute procedures, and changes to Korean customs inspection procedures.
Overall, from what we know so far, the KORUS renegotiation looks like a minor tweak to U.S. trade relationships, rather than the wholesale revolution that is sometimes indicated by Trump’s tweets. That is probably for the best. However, KORUS has been a somewhat minor point on the Trump administration’s trade agenda, so we should not take too much comfort from this. It may be that the administration simply wanted to focus its more aggressive trade actions on other countries. The U.S. trade relationship with each country is different. The two big items that are coming next on the agenda are the NAFTA renegotiation and the U.S.-China trade relationship. The resolution of these will tell us more about whether the administration can figure out a way to put together a coherent trade strategy that does not unravel decades of trade liberalization.
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