Confirming reports from Seoul this week, White House officials said that they had reached a “historic” agreement in principle with the South Korean government to overhaul the existing Korea-U.S. trade deal known as KORUS.
South Korea agreed to limit its steel exports to the United States, a key U.S. goal, and take several steps to open its auto market to American companies. In return, Trump agreed to exempt South Korea from his new 25 percent tariff on imported steel.
But threatening negotiating partners with tariffs unless they make concessions, as the United States did with South Korea, is not President Trump’s innovation. It is a tactic that Washington often used before the creation of the World Trade Organization, though one that did little to reduce the bilateral trade deficits that preoccupy the president.
It also may prove a riskier strategy when U.S. negotiators take on more-powerful countries, including China, one of Trump’s top rhetorical targets and the largest U.S. trading partner. U.S. negotiators also confront a longer list of issues in talks aimed at renegotiating another trade deal, the North American Free Trade Agreement.
Lori Wallach, director of Public Citizen’s Global Trade Watch, said the “limited” achievements in the new South Korean accord fell short of the revolution in trade policy that the president has promised and “puts added pressure on the NAFTA renegotiations to deliver a deal that eliminates the job outsourcing incentives in our past trade deals and adds strong labor and environmental standards with swift and strong enforcement.”
Still, administration officials regard the South Korean agreement as a big political win for the president and a sign of fundamental change in Washington’s approach to trade disputes.
For nearly a quarter-century, the U.S. government has taken most of its complaints about unfair trade practices to the WTO. The Geneva-based global trade body presides over a quasi-judicial process designed to drain the political heat from disputes, with final settlements often taking years to materialize.
Trump has no interest in letting the heat dissipate.
“He’s resurrecting the 1980s — a series of political compromises, mostly with Japan, to deal with U.S. concerns,” said Edward Alden, a trade expert with the Council on Foreign Relations. “That was the Reagan playbook. The reason it hasn’t been used in a long time is the U.S. made a decision that binding dispute settlement was better than tariffs as a weapon.”
Starting with a 1981 accord that set a ceiling on imports of Japanese vehicles, the United States tried for much of that decade to close its yawning trade deficit with Japan through voluntary export restraints. Dozens of other deals limited shipments of Japanese products such as steel, machine tools and semiconductors, while the 1985 Plaza Accord lowered the dollar’s value in a bid to boost U.S. exports.
The agreements defused politically sensitive controversies but left the U.S. trade deficit with Japan higher at the end of the 1980s than it was when the two countries began implementing the voluntary limits.
Trump and his chief trade negotiator, Robert E. Lighthizer, both lack faith in the multilateral trading system that Republicans and Democrats have shared since the WTO’s founding in 1995. They prefer a nationalistic carrot-and-stick approach, which offers access to the $20 trillion U.S. economy while threatening unilateral tariffs.
“The Trump-Lighthizer approach is [that] throwing around the weight of the world’s largest market is more effective than working through the WTO system,” Alden said.
Trump threatened for more than a year to rip up trade deals unless U.S. negotiating partners made concessions designed to return lost manufacturing jobs to the United States. All that tough talk did not produce much — until this past weekend, when South Korea said it agreed to revise a six-year-old trade deal that Trump had derided as “horrible” and “a disaster.”
In 2017, the United States ran a deficit of $22.9 billion in its trade with South Korea, compared with $16.6 billion in 2012, the year KORUS took effect. The new deal is expected to reduce the gap by several billion dollars, a U.S. trade official said.
“The agreement did not perform up to its expectations,” said a second senior administration official. “We have been disappointed over and over.”
Under the new deal, U.S. automakers can ship 50,000 cars that comply with U.S. safety standards rather than tougher South Korean requirements. But Ford and General Motors last year sent fewer than 10,000 cars each to South Korea, where American cars lag behind German vehicles in popularity.
The United States also won the right to retain an existing 25 percent tariff on imported pickup trucks for 20 years beyond its scheduled expiration in 2021. To date, no South Korean company has exported any trucks to the United States, although Hyundai has plans to do so.
Phil Levy, a senior economist in the George W. Bush White House, pronounced the deal unimpressive. “The expanded quota on autos allows in cars we don’t want to ship. The extended tariff on trucks blocks pickups the Koreans are not exporting. And the limitation on Korean steel exports will make life more difficult for all the U.S. manufacturers who use Korean steel,” he said. “In what way does this help?”
Treasury Department officials are negotiating a side agreement that would bar currency devaluations aimed at gaining a competitive advantage. Officials described the arrangement as historic, though they conceded it lacks enforcement mechanisms.
“Solid, albeit modest, improvements were made to KORUS,” said Wendy Cutler, a former U.S. trade negotiator. “However, they aren’t of the magnitude to suggest that Trump has now transformed what he called ‘one of the worst deals ever’ into a new type of fair and reciprocal deal.”
The administration’s bare-knuckle style appears to have succeeded in this instance.
In return for Trump’s dropping his new tariff, South Korea agreed to limit its steel exports to the United States to 70 percent of its average over the past three years, or 2.68 million tons. The United States also secured a doubling of the number of American-made cars meeting only U.S. safety standards that can be sent to South Korea as well as retaining high U.S. tariffs on imported pickup trucks.
“We caught them at a vulnerable time, and we threatened to pull the rug out from under them,” said Levy. “Korea could not afford to have a major split with the United States.”
Whether a similar approach will work with China or in the NAFTA negotiations remains to be seen.
On Monday, Chinese Premier Li Keqiang said China would treat domestic and foreign companies the same and would no longer force U.S. companies to surrender their technology in return for market access.
The statement came only days after Trump announced plans to impose tariffs on up to $60 billion worth of Chinese imports and restrict future Chinese investments in U.S. technology companies.
Yet China has made similar promises about halting its policy of forced technology transfer on at least eight occasions since 2010, according to a report by Lighthizer’s office on the country’s intellectual-property violations.