SEOUL — South Korea's trade community is on the defensive after President Trump's renewed call to terminate a free-trade agreement with the country, which many experts here see as a puzzling move during an inopportune time of heightened tensions over North Korea's nuclear and missile program.
Earlier this month, Trump instructed advisers to prepare to withdraw from the agreement, also known as Korus. He seemed to be making good on a threat he had floated since April, when he claimed that the deal, now in its fifth year, was "horrible" and left America "destroyed."
The man who negotiated the free-trade agreement, or FTA, for South Korea vigorously disputes that, and argues that the timing couldn’t be worse. “South Korea has been an adamant ally to the United States for the last 70 years. Now, North Korea is provoking and China is expanding their power, flexing muscles,” said Choi Seok-young. “We don’t quite understand what is the main purpose of Mr. Trump attacking Korea by terminating Korea-U.S. FTA at this critical time.”
His American counterpart in the negotiations, Wendy Cutler, warns that a U.S. pullout from the agreement would probably drive South Korea into a closer economic relationship with China.
The White House has not made a formal announcement on terminating the deal. In fact, days after reports surfaced of Trump’s move to withdraw, U.S. Trade Representative Robert E. Lighthizer contradicted Trump, telling reporters that the administration wants to renegotiate the deal and make “some amendments” instead.
The uncertainty may be why, at least in part, the administration of South Korean President Moon Jae-in has not yet publicly responded to Trump’s latest threat.
Since Trump’s election, officials here have stressed that the agreement, while not perfect, is designed to be mutually beneficial. Trump’s consistent criticism of the deal has left South Korean trade officials and experts rejecting his characterization of it as a U.S. job killer, and instead highlighting gains that the United States has made in the Korean market, sometimes to the detriment of Korean workers.
“The U.S. argument to renegotiate the Korus FTA is very difficult to understand from the Korean perspective,” Choi said. He called it a “revolutionary” move.
“That makes me wonder: How can we trust the United States? They pushed it very strongly 10 years ago,” he said, “and after a while, they come back to abolish it. It’s a matter of trust, and this kind of attitude does not help in strengthening allies.”
The agreement was negotiated and signed under President George W. Bush. It was ratified by Congress in 2011 and took effect in 2012.
It wasn’t universally acclaimed in South Korea. Both in 2008 when the agreement was signed and in 2011 when Congress ratified it, there was strong opposition here to the deal. There were daily demonstrations by Korean workers, particularly farmers who opposed increased U.S. beef imports. In 2011, an opposition leader set off tear gas on the parliament floor in protest.
Since 2012, Korus has produced mixed results for the United States. The U.S. merchandise trade deficit with South Korea more than doubled, which is the basis of Trump’s rejection of the deal, even though economists generally agree that trade imbalances are a result of broader macroeconomic factors and not simply because of bilateral trade of goods and services.
Overall, Korea accounts for only 2.5 percent of the 2017 U.S. trade deficit in goods and services.
The trade growth on both sides has been slower than initially anticipated.
Some major U.S. industries, including beef and dairy, have benefited. South Korean experts note that the increase in imports of cheap, high-quality U.S. agriculture and dairy products has hurt Korean agricultural workers.
The U.S. service surplus with Korea increased under Korus. So far in 2017, U.S. merchandise exports to Korea have seen a sharp increase compared with 2016, while U.S. imports from Korea have been flat, noted Jeffrey Schott at the Peterson Institute for International Economics.
The South Korean government-funded Korea Institute for International Economic Policy says that if Korus was terminated, the United States would lose its advantage in auto, manufacturing, agriculture and service sectors in Korea.
The research institute estimated that if the United States withdrew from the deal, its exports would drop 2 percent while U.S. imports would drop 4.3 percent.
Korus removed car tariffs in 2016, allowing rapid growth of U.S. car exports to Korea. Imports have been taking a larger share of the Korean car market over the past five years, and since 2012, the sale of U.S.-made cars in Korea increased by almost 90 percent, according to Schott.
This isn’t helping the Korean car market, which already is struggling to compete with European and Japanese imports, said Kim Jong-bum, an international trade law professor at Yonsei University Graduate School of International Studies.
For example, “Hyundai is facing more competition in the Korean market because the markets are open to the E.U. and U.S. cars. And they are very high-quality cars,” Kim said. But it’s not been all bad, as the Korean auto market also has benefited from exports to the United States, he said. Government data released this week showed that Korean auto exports to North America and Europe rose sharply in August.
If the United States abolishes the trade agreement, its major trading partners, such as the European Union and Canada, would enjoy duty-free access, said Cutler, while American goods might face an average 14 percent tariff.
“Our companies and farmers would quickly lose the important inroads that they have made in the Korean market,” said Cutler, who is vice president of the Asia Society Policy Institute.
Cutler said 2016 was "a record year for Korean investment in the United States, which has resulted in tens of thousands of high-
paying U.S. jobs. It's hard to believe that this trend would continue without Korus."