The Significance of the South Korea Trade Deal
April 3, 2018
Last week, the administration announced the conclusion of its first revised trade agreement—the one we have with South Korea. The White House has been touting this as a great victory for the president’s trade policy and for American workers, although, oddly, he said last Thursday that he was going to delay signing it, which one would think from his point of view would be a case of snatching defeat from the jaws of victory.
Much of the commentary about the agreement has been about whether it amounts to anything, with the most common response being, “meh.” Critics have argued that the increase in the number of cars we can ship doesn’t matter because we’re below the current cap, that postponing the phaseout of our 25 percent truck tariff simply maintains the status quo, and that the currency provision is nonbinding and therefore irrelevant.
That is not the main thing I want to talk about this week, but I do think the critics are being unduly harsh. The agreement also requires Korea to accept some U.S. standards with respect to autos, which, if they actually do it, should enable our auto exports to grow. Raising the cap may not have an immediate impact, but it will contribute to long-term growth—if the American auto companies choose to take advantage of it. Similarly, phaseout of the U.S. truck tariff was scheduled to begin next year under the current agreement, so postponing that saves our industry from a likely onslaught of very competitive light trucks. One may or may not agree on the merits of a prohibitive truck tariff (which was itself the result of the long-ago “chicken war” we had with Europe), but it clearly has had an impact on our industry, which will continue now that it is not being phased out immediately. In other words, “meh” understates the significance of the agreement.
One area that will have an impact, of course, is Korea’s agreement to a steel quota of 70 percent of the average last three years’ production. It will be interesting to see how that affects the composition of Korean exports. Normally, quotas lead to movement up the value-added chain, as the exporting country, limited in quantity, exports higher-value items in order to capture as much benefit as it can within the numerical limit. It remains to be seen how, or even whether, the Koreans can do that. It will also be interesting to see how the quota affects Korean purchases of Chinese steel for rolling into higher-value products. Will the Koreans do more of that in order to capture the value added, or will they rely more on their own production?
For me, however, the interesting thing about this agreement was not how good it is, but what it says about the president’s trade negotiating focus. As originally negotiated, the Korea-U.S. Free Trade Agreement (KORUS FTA) is a complex agreement of many parts, but the administration chose to focus on only a few of them, mostly related to traditional manufacturing sectors like steel and autos. (There is a pharmaceutical provision that will be welcomed by our companies if it ends up actually being implemented.) This is consistent with what the president has said and done over the past year:
- He is primarily interested in reducing the bilateral deficit and thus looks at things that could have a short-term impact on that. Since autos is the largest component of our deficit with South Korea, it makes sense to give it special attention.
- With respect to deficits, he looks only at goods, not services (where we frequently have a surplus that at least partially offsets the goods deficit), and within the goods category, he looks primarily at traditional heavy manufacturing, most notably cars and steel.
- He is not interested in the nuts and bolts of trade—the rules and procedures that make the system work—or in the procedures for settling disputes. In that sense his priorities are transactional rather than architectural—get a short-term market access concession that he can attach a number to and then brag about rather than muck about in the weeds trying to build a more open structure that will produce long-term benefits.
It would be wise to remember these things as the North American Free Trade Agreement (NAFTA) negotiations proceed and as our dance with China unfolds (or unravels, depending on your perspective). In the case of China in particular, if the president’s focus is primarily on the bilateral goods deficit, my advice to the Chinese is simple: sell less; buy more. That’s a lot easier to articulate, and also a lot easier to achieve, than telling them they need to reform their economy, promote more domestic consumption, provide freer access to the internet, and stop requiring technology transfer as a condition of doing business. Winning Trump’s way may be a sugar rush for our economy, and perhaps for him politically (depending on Chinese retaliation), but it will inevitably wear off, and if we have not tackled the real problems, we will end up that much worse off.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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