BUSINESS

[News Analysis] Trade experts debunk Trump’s ‘unfair’ FTA claims

By Julie Kim Jackson
  • Published : Jul 6, 2017 - 16:11
  • Updated : Jul 6, 2017 - 16:11
Amid drawn-out speculation over the future of the Korea-US Free Trade Agreement, the two countries have been voicing differing views regarding the mutual benefits of the bilateral trade deal, which has now reached its fifth year. 

US President Donald Trump is arguing that the current stipulations are unfair and is the reason for the country’s worsening trade deficit. Trump has referred to the KORUS-FTA as “unacceptable” and a “horrible deal,” suggesting the deal does not coincide with Trump’s “America First” policy measures. 

However, following President Moon Jae-in’s recent visit to Washington for the Korea-US summit, the Korean government has contended that the US’ trade imbalance claims are misleading, adding that overall, both parties reaped mutual economic benefits.

“The disparity between the US and Korea actually comes from the different ways of evaluating the value of the US-Korea FTA,” Ahn Se-young, a trade professor at Sogang University, told The Korea Herald.

“In reality there are multiple effects of the US-Korea FTA such as GDP growth, consumer welfare, trade balance and job creation,” Ahn said, adding the previous Obama administration admired the FTA as a golden standard because of these multiple effects.

“But US President Donald Trump suddenly changed the way of evaluating the US-Korea FTA, only focusing on trade balance,” he continued. “Korea’s trade surplus vis-a-vis the US has doubled in the last five years since the inauguration of the US-Korea FTA. Now, President Donald Trump is criticizing the US-Korea FTA as a US job killer.”

(Yonhap)

According to the 2017 National Trade Estimate Report, US goods trade deficit with Korea showed a 2.3 percent decrease last year compared to 2015. The data also showed that US imports from Korea were $69.9 billion in 2016, down 2.5 percent from 2015, with Korea ranked as the United States’ seventh-largest goods export market in 2016.

Between 2011 and 2015, overall US-Korea goods and services trade rose from $126.5 billion to $146.8 billion. The US’ goods and services exports have increased overall, with services exports reaching $20.5 billion, up 23.1 percent compared to pre-FTA levels.

While the Trump administration still appears firm in its stance to renegotiate the terms of the FTA, claiming it is unjustly balanced, some local trade experts do not share the same view.

“In my view, the KORUS FTA is a cutting-edge bilateral FTA that is the best that can be achieved by any two nations in the world trading system today,” said Kim Jong-bum, international trade law professor at Yonsei University.

“The KORUS FTA needs possibly updating and retooling, not because the deal is unfair or bad but because it needs to meet the demands of the new global economy that is fast evolving,” Kim says. 

To support his calls for revision, Trump has said that country’s trade shortcomings with Korea has increased to more than $11 billion since the deal.

“It is true that the US trade deficit with Korea increased since the enactment of the KORUS,” said Kim. “However, trade balance is generally not the best measure of benefits from an FTA.”

“The US trade deficit vis-a-vis Korea increased in the past five years because of the stronger US economy and the relatively stagnant Korean economy in the past years,” he continued.

“As the Korean economy recovers in 2017, the US trade deficit rise will slow down. Over the long run, the KORUS FTA will contribute to improving the US trade deficit position with Korea, because Korea had much higher average tariffs than the US before the FTA.”

According to the professor, the elimination of Korea’s higher tariffs would lead to an increase in US exports to the peninsula more than Korea’s exports to the US. He suggests the Trump administration wait another five years to see the full improvement in the trade balance with Korea.

“The US will eventually gain more from the KORUS than Korea even if you measure the benefits of an FTA by trade balance measure. ... In this measure, the country that is importing more because of tariff elimination is benefiting more. As its stands today, the US is benefiting more than Korea from the KORUS FTA,” said Kim.

“From the US’ position, in the absence of the KORUS FTA, US exporters will be facing very high tariffs that apply to all non-FTA partners. This would be huge penalties for US exporters to Korea,” he added. “The US has to remember that Korea has concluded major FTAs with the EU and China. US exporters will be literally driven out of the Korean market by more competitive exporters from the EU and China, which benefit from FTA tariffs.”

During the recent Washington summit, Moon also revealed that US officials emphasized the country’s trade deficit in the auto and steel industries, alluding to the Trump administration’s possible push for renegotiations in those sectors.  

However, according to the NTE Report, US automobile exports to Korea increased by 280 percent from 2011 to 2016, from $418 million in 2011 to $1.6 billion in 2016.

The data also showed that exports of American vehicles to Korea increased 20 times faster than US automobile exports to the world over the same period, meaning Korea currently sits as the United States’ eighth-largest export market by value, up from the 17th-largest market in 2011.

“The increased US trade deficit with Korea implies that US consumers are enjoying more of Korean products,” said Heo Yoon, an international trade professor at Sogang University. “What’s important between the two economies is not trade deficit nor trade surplus, but trade volume.”

“(The) two countries need to expand their trade volume to benefit from economies of scale, which will lead to improved comparative advantage in the global market.” He added. “KORUS FTA could be a part of the reasons, from the US’ perspective, for the continued and increased trade deficit, but not the major factor. Major determinants are lower for US products’ competitiveness in the Korean market compared to those of its competitors like Japan, Germany, China and Taiwan.”

By Julie Jackson (juliejackson@heraldcorp.com)