KORUS Revision: Not the Worst Outcome

March 26, 2018

On March 26, it was announced that Seoul and Washington had reached a deal to revise the U.S.-Korea Free Trade Agreement (KORUS FTA).  U.S. president Donald Trump had previously called the KORUS FTA a “horrible deal” and threatened to withdraw from the bilateral agreement.  The two sides entered into negotiations to revise the deal beginning on August 22, 2017.

The revised agreement -- which follows on from the administration’s decision to exempt South Korea from 25% steel tariffs recently imposed by President Donald Trump under Section 232 of the Trade Expansion Act of 1962 (Proclamation 9705) on March 8, 2018 -- limits South Korean steel exports to the U.S. to 70 percent of the last three years’ annual average. This amounts to about 2.68 million tons of steel exports.

In the renegotiated deal, South Korea also agreed that U.S. auto companies would be allowed to export 50,000 vehicles per automaker per year into the country under U.S. safety standards. The previous limit was 25,000 vehicles per automaker per year, that comply with U.S. safety standards and does not require additional measures to meet South Korean safety standards. Finally, the two countries also agreed in the deal that U.S. tariffs on Korean trucks would be extended by 20 years until 2041.

• This compromise agreement is a better outcome than expected given U.S. president Donald Trump’s previous criticisms of the agreement and threats to walk away from it.

• The deal allows President Trump to make the argument that he has helped protect the U.S. steel and auto industries (though experts believe it is unlikely that U.S. automakers will export that many cars to South Korea given the average under the current cap of 25,000 is only 10,000 for the last year – imports finally exceeded 60,000 units in 2016 ).

• On steel, the U.S. essentially leveraged the unilateral tariff on steel (and South Korea’s exemption) to achieve a 30 percent reduction in South Korean exports.

• The revision represents efforts by both sides to keep the alliance on good footing given the need for policy coordination on the North Korean nuclear issue and the upcoming summits between the two Koreas and U.S. and North Korea.

• If there is any tacit issue linkage with this agreement, we might expect to see South Korea agreeing to a higher burden sharing obligation in ongoing negotiations on a new Special Measures Agreement where the U.S. is pushing for South Korea to pay larger share of costs for stationing U.S. forces on the Korean peninsula.