Tag Archive | "FTA"

Seoul, Washington, and Pyongyang: Delicate Diplomatic Triangle for President Moon Jae-in

By Robert R. King

The campaign is over; ballots have been cast; the result is clear—Moon Jae-in will be in the Blue House within a few days.

The most critical foreign affairs issue on the agenda of the new President is the South’s relationship with North Korea, and entwined with that issue is its relationship with the United States.  Though the new American President passed his first 100 days in office just a few days ago, there is still considerable uncertainty about the direction of American foreign policy, and one of the most sensitive issues facing the United States is North Korea and its nuclear ambitions.  The relationship with North Korea is the most critical question for the South and its new president, and because of the military ties with Washington, how to deal with the North will also be the key issue in relations with Washington.

President Moon begins his contacts with the new American president at something of a disadvantage.  When President Trump moved into the White House, South Korea was in the midst of the impeachment of Moon’s elected predecessor Park Geun-hye.  As a result, Trump met with Japan’s Prime Minister during the transition (his first post-election meeting with a foreign leader) and again after his inauguration in Washington and at Mar-a-Lago.  The American President also met in early April with Chinese President Xi Jingping.  The American Secretary of Defense and Secretary of State have both met with counterparts in Seoul in recognition of the importance of Korea in American policy, but the chemistry and content of bond between the two presidents has yet to emerge.

It is also not clear where there may be differences on the North between the two leaders.  During the campaign, Moon has expressed the desire for engagement with the North and better relations.  Trump has expressed serious concern about North Korea’s nuclear and missile programs, but he has also expressed a willingness to meet directly with the North’s leader Kim Jong-un.  His first statement was made early in his tenure, but he repeated it again just last week.  Trump told Bloomberg News just a week ago that he would meet with Kim Jong-un under the right circumstances—“If it would be appropriate for me to meet with him, I would absolutely; I would be honored to do it.  If it’s under the, again, under the right circumstances. But I would do that.”

South Korea’s new president, who was still a candidate ten days ago, cited this statement by America’s President and concluded that Trump is “more reasonable than perceived” and suggested that he and Trump were taking a similar position in favor of bringing the North back to negotiations on the nuclear issue.  It remains to be seen, however, how close the two presidents are on the details of how best to bring the North into denuclearization negotiations.

Another potentially serious issue that could create problems between the two presidents and their countries with regard to policy toward the North is THAAD, the U.S. defensive missile system now deployed in the South as agreed to by Moon’s predecessor.  The U.S. rushed to get the system in place before the election, although Moon expressed concerns about the deployment and the belief that the next government should review the decision, his political and ideological allies were vocally opposed to the deployment throughout the election.  This will likely be a serious point of contention that could create difficulties for relations between the U.S. and South Korea.

It is made more complex by the fact that China has been particularly opposed to THAAD and has taken steps to make the deployment more costly for the South by significantly cutting back Chinese tourism to South Korea—a major source of income and consumer goods sales in the South—as well as boycotting retail outlets in China owned by the South Korean conglomerate which sold land to the South Korean government on which THAAD is based.  THAAD is an issue that has serious security and domestic political implications for President Moon, but one of the most difficult will be the effect the issue has on the American-South Korea relationship.

Making the issue even more awkward and controversial was President Trump’s pronouncement last week that he expected the South to pay the $1 billion cost for the missile defense system.  His comment came less than ten days before the South Korean election, and was certainly not welcomed by pro-U.S. presidential candidates in the South.  Trump’s statement calling for the South to pay for THAAD was linked to his call for a renegotiation of the U.S.-South Korea trade agreement (KORUS).  The U.S. National Security Advisor, General McMasters, however, reassured his counterpart in Seoul that the U.S. would keep its previous commitment on the missile system.

The bottom line is that uncertainty and shifting policy signals from the Oval Office will not make the task of the new South Korean president an easy one.  He will likely have his own learning-curve and unintended missteps, which will make his task harder.  The relationship between Seoul and Washington is critically important for both countries, however.  It will take a great deal of maturity and understanding on the part of both presidents to deal with North Korea.  There is a great deal at stake for all sides.

 

Robert R. King is a Non-Resident Fellow at the Korea Economic Institute of America.   He is former U.S. Special Envoy for North Korea Human Rights.  The views expressed here are his own.

Photo from Morning Calm Weekly Newspaper Installation Management Command, U.S. Army’s photostream on flickr Creative Commons.

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Prospects for U.S.-Korea Economic Relations under New Administrations in Seoul and Washington

By Phil Eskeland

In 2017, both the Republic of Korea (ROK) and the United States face various challenges and opportunities in the growing economic relationship.  Korea is now America’s 6th largest trading partner, ahead of the United Kingdom and France.  As a nation that once was a major recipient of U.S. foreign aid, South Korea has rapidly advanced to become the world’s 13th largest economy, ahead of Canada and Spain.  However, these achievements are not locked in forever.  As the new ROK and U.S. administrations interact and deal with each other, both sides must avoid “unforced errors” and cooperate with each other as much as possible to confront domestic and international trends that place impediments on both economies, such as stagnant wage growth, aging population, mismatched workforce, and the siren song of trade protectionism.

The first major challenge is establishing an accurate analysis of the Korea-U.S. Free Trade Agreement (KORUS FTA).  The agreement’s success or failure should not be measured by just a single metric of the merchandise trade deficit, which parenthetically decreased in 2016, but on a comprehensive review of all of its effects.

  1. Total trade volume (imports and exports) between the two countries has increased since pre-KORUS levels (2011).  In fact, the most recent data from the Commerce Department shows that the U.S. exported a record level of manufactured goods and agricultural products to Korea for the month of March 2017 at $4.36 billion, the highest level since March 2014.
  2. The United States continues to break records in the export of services to Korea, producing the highest trade surplus ever for the U.S. in 2016.  This trade surplus reduced the overall goods and services trade deficit between the two countries to $17 billion.  As a result, Korea’s bilateral trade deficit with the U.S. is ranked well below other nations, including China, Germany, Mexico, Japan, and even Italy.
  3. According to the Commerce Department, U.S. exports to Korea have led to an increase of 87,000 jobs in the United States between 2009 and 2015, including 55,000 jobs in the goods sector, which pay 16 percent more on average than other employment.
  4. Korea now represents the 5th fastest-growing source of Foreign Direct Investment (FDI) into the United States, employing over 45,000 workers in the U.S. earning an average compensation package of $92,000 a year.
  5. Because U.S. exports of items covered by KORUS have increased by 18 percent since 2011, the agreement has helped to reduce the merchandise trade deficit by nearly $16 billion.

Thus, the KORUS FTA meets every metric of a successful trade agreement as outlined by the Trump Administration.  In fact, if reducing the trade deficit is the main concern, then the Trump Administration should focus their attention on other countries first before Korea.

Nonetheless, there is always room for improvement.  The KORUS FTA has a binational committee process to iron out differences in implementing the agreement.  This has greatly helped resolve numerous thorny issues without having to go through the difficult process of amending KORUS.  For example, clarifying the rules of origin on orange juice helped to dramatically increase sales to Korea, giving a boost to Florida citrus growers and producers at a critical moment when the U.S. market is declining.  In addition, Donald Trump won the Sunshine State – a key “swing” state with the most Electoral College votes – in the last presidential election.  However, both sides should avoid unforced errors by either scrapping the agreement or refusing to negotiate.  If KORUS is scrapped, hard-won gains for many U.S. exporters, including Florida orange juice producers, would vanish.  While KORUS is relatively new, it could be updated in a few areas, such as in intellectual property and e-commerce, though preferably through supplemental side agreements to avoid re-opening up the entire text.  The Trump Administration could lift the relevant IP and e-commerce sections from the now defunct Trans Pacific Partnership (TPP) agreement and offer to add these provisions to KORUS.

Second, international monetary policy could be another challenge to the U.S.-Korea relationship.  Every six months, the U.S. Treasury produces a report that identifies potential currency manipulators if three conditions are met:  (1) if there is a significant bilateral trade surplus with the United States; (2) if there is a material current account surplus; and (3) if the nation has engaged in persistent one-sided intervention in the foreign exchange market.  While Treasury did not identify any trading partner as a currency manipulator in its most recent report, the department included six countries, including Korea, on its monitoring list.  Some in the U.S. advocate adding provisions to prevent currency manipulation by other nations into trade agreements.  However, this challenge could represent an opportunity for Korea to be pro-active in responding to critics by being fully transparent in any governmental actions in foreign exchange operations.

Third, U.S. “fair trade” laws could also represent a challenge and opportunity in U.S.-Korea economic relations.  As with most U.S. administrations, the emphasis on trade during the first year in office usually focuses on enforcing existing agreements, not enacting new ones.  The Trump Administration is no different, but the prominence of trade enforcement has been amplified, particularly with the announcements of a series of reviews and investigations.  Both sides should take a step back to insure that enforcement actions do not lead misperceptions and unforced errors.  Korean companies should be extremely vigilant to make sure that they do not sell their product in the U.S. at a loss.  On the flip side, the Commerce Department should also be diligent to make sure it is not biased towards U.S. industry regarding allegations of unfair trade.  For example, the U.S. should implement the World Trade Organization (WTO) decision that disallows the use of “zeroing” (i.e., disregarding allegedly “non-dumped” sales in order to inflate dumping margins) to estimate higher tariff penalties.  Commerce should also consider the ramifications of a trade case for the entire U.S. economy because, ultimately, increased tariffs are another form of taxation that gets passed along to consumers in terms of higher prices.  As learned during the 2002/2003 steel tariff debate, many more American jobs at manufacturing facilities that used steel were at risk than in the steel industry as their final products were priced out of the marketplace.

Fourth, the two new administrations should give an opportunity for Korea to shine by highlighting and publicizing more of its FDI into the United States.  As stated above, Korea is now the 5th fastest growing source of FDI into the United States, which has accelerated since the implementation of the KORUS FTA.  If new investments are forthcoming, Korean companies would do well to let the American people and the Trump Administration know of this news to generate good will.

Finally, both countries would do well to continue its global partnership on numerous fronts:  cybersecurity, space, science, energy, environment, health security, Arctic cooperation, among others, that have enormous economic ramifications for both countries.  These important issues unfortunately do not receive the attention that they deserve because they are non-contentious, apolitical concerns.  Just because these initiatives were started by previous administrations should not mean that they are put to the wayside.  If anything, these issues, such as continuing the work of the U.S.-Korea Joint Committee on Science and Technology, should form the foundation for building further cooperation on economic and trade issues between the U.S. and the Republic of Korea.

 

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.

Photo from Saik Kim’s photostream on flickr Creative Commons.        

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Why This May Be South Korea’s Most Consequential Presidential Election

By Troy Stangarone

After months of protests across South Korea that culminated in the impeachment of President Park Geun-hye, South Koreans will go to the polls on May 9 to select her successor. Regardless of which candidate wins the election, the upcoming presidency may be the most significant for South Korea since the transition to the opposition with Kim Dae-jung cemented the democratic ideal of the transition of power and he was thrust into managing what is known in South Korea as the IMF crisis. The next administration will come into office at time when South Korea faces a wide array of economic, political, social, and security challenges.

The next president will need to begin by restoring confidence in government. The impeachment of President Park has divided society and exposed the continuing ties between government and business that have left a legacy of scandal trailing each administration. Prior scandals have not always directly involved the president, but the impeachment indicates a growing intolerance in South Korean society for ever too close of relations between the government and business. Addressing this issue will mean the next administration will need to consider reforms in both government and the chaebol.

If restoring confidence in government were not challenging enough, the next president will come into office at a time when South Korea faces critical domestic and international challenges that will need to be addressed. The South Korean economy in many ways is at a crossroads. After years of success as an exporting powerhouse, exports have been largely stagnant in recent years and South Korea faces increasing competition from lower wage countries such as China which have cut into key sectors for South Korea’s economy such as steel and shipbuilding, while becoming increasingly competitive in consumer electronics as well.

The challenges from international economic competition are coupled with domestic economic challenges. South Korea’s rate of economic growth has continued to decline and is expected to only by 2 percent in 2018. As the economy slows, income inequality has risen and will likely only continue to do so the economy becomes more oriented around services industries.

To begin addressing slowing economic growth and income inequality, the next administration will need to focus on structural reforms and labor market reform. South Korea needs structural reforms to address overcapacity in troubled areas such as steel, shipping, and ship building. At the same time, reforms are needed in the labor market as well. South Korea’s current two-tiered system made of a well-protected class of permanent workers and temporary workers who have few protections has created rigidities in the labor market that have limited job growth, especially for the young.

South Korea’s economic challenges have also created social challenges. As South Korean society rapidly ages, young South Koreans have seen their opportunities narrow even with one of the highest rates of college graduates in the world. While facing decade long highs in unemployment, young South Koreans face concerns about their future in a slowing economy and in a society that they see as constraining their opportunities.

If the young have seen increasing challenges, South Korea itself faces impending problems from its rapidly aging population. In the years ahead, over the next administration the working age population is expected to decline to just under 36 million and continue declining in the years after while the overall population will continue to grow until 2030. This means an increasing percentage of South Korea’s population will be in retirement with fewer workers to support them. This challenge is compounded by South Korea having the highest level of old age poverty in the OECD despite President Park having worked to improve the social safety net.

South Korea’s international relations may not be any less complex than its domestic challenges. On top of the agenda will be North Korea. While that will not have changed from prior administrations, Pyongyang has significantly advanced its nuclear weapon and missile programs under Kim Jong-un. As a result, the strategic situation could significantly change under the next administration should North Korea successfully deploy not only a nuclear deterrent but a viable second strike capability.

As a result, the administration may find its options for dealing with North Korea constrained, both by North Korea’s progress on its weapons programs and the policies of regional states. Relations with China have soured over the decision to deploy THAAD to defend against North Korean missiles, and China’s use of economic pressure may leave the next administration with a Scylla and Charybdis type dilemma of accepting significant economic harm or weakening South Korea’s defenses against North Korea.

Managing this situation will require close relations with the United States and Japan, both of which could be problematic if divisions over how to handle North Korea develop, or in the case of Japan historical issues complicate relations. While the Trump administration so far has been more conventional in its approach to North Korea than many foreign policy issues, Seoul and Washington will need to ensure that they do not diverge on how to handle North Korea. At the same time, there could be tension in the relationship, as the Trump administration is taking a harder position on trade and has indicated that it may review the KORUS FTA.

Whoever South Korea elects as president in May will face a more fluid domestic and international environment than prior South Korean presidents, one shaped by the impeachment and the need to enact reforms. While South Korea has gone through difficult economic times, such as the Asian Financial Crisis, or faced challenging relations with the United States or China, it is the degree and the number of challenges that South Korea may face over the next five years that make this election so consequential.

Troy Stangarone is the Senior Director for Congressional Affairs at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from sinano1000’s photostream on flickr Creative Commons.

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The European Union: A Key Partnership for the Next South Korean Administration

This is the fifth in a series of blogs looking at South Korea’s foreign relations in the run up to the next Korean administration taking office on May 10. The series also includes blogs on relations with North Korea, the United StatesChina, Japan, Russia, the Middle EastASEAN, Africa, and Latin America

By Gwanghyun Pyun

Since 1963, the Republic of Korea (ROK) and what has evolved into the European Union (EU) have been steadily developing economic and diplomatic relations. The EU, a large single market consisting of 28 European countries, is an important trading partner for the ROK and its soft power in the global community can assist with peace on the Korean peninsula.  Most importantly, the EU and South Korea share important values such as human rights, democracy and a market economy, making the EU an important partner for South Korea and the next presidential administration.   

The fundamental basis of the EU-Korea relationship, a Free Trade Agreement (FTA)

When the EU-ROK FTA talks began, the South Korean government sought to expand its export market, raise the amount of foreign investment in South Korea and increase job opportunities. The EU is the world’s largest trade block and an advanced economy that primarily trades in are automobiles, machinery and appliances, transport equipment and chemical products with South Korea. In fact, the amount of trade between the EU and the ROK has steadily increased to 90 billion euros since the agreement came into effect in 2011.

However, South Korea has not seen the results it expected. According to a report by the Korea Institute for International Economic Policy (KIEP), five years later, the EU-ROK FTA has resulted in just one-third of the benefits that the South Korean government expected initially. The report concluded that the result comes from the economic recession in the EU from lingering Eurozone related issues, but that South Korea has fared better than other countries such as China and Japan.

Although this unsatisfying result has been caused by the EU’s economic recession, there are rising voices saying that the FTA should be revised. Indeed, at a meeting of Asia-Europe Meeting (ASEM) last year, then President Park Geun-hye and EU leaders already shared the view that there was a need to revise the FTA.

Besides the economic relationship, the EU and South Korea have developed a strategic partnership.

The EU and ROK have entered into and developed three major agreements – the FTA (2011), an EU-Korea Framework Agreement (2010) and The Framework Participation Agreement (2014). With these agreements, the EU and South Korea can promote coordination and cooperation on international and regional concerns.

Based on these partnerships, the EU can support South Korean international policy. For example, when North Korea conducted their fifth nuclear test last year, South Korea and the EU agreed to utilize all means necessary for denuclearization. Also, the EU has currently imposed unilateral sanctions against North Korea. On the other hand, Last February, Chancellor Angela Merkel said during a meeting with the U.S. President Trump that ‘the EU-Korea FTA is win-win deal’ to champion free trade. In addition, the EU can expand its free trade market to other Asian countries based on the case of EU-Korea FTA that is the EU’s first trade deal with an Asian country.

Furthermore, South Korea and the EU have many areas of possible corporation because they share common values in various fields. First, both recognize the importance of higher education. They have kept up academic exchanges through Erasmus+ and the co-funded Industrialised Countries Instrument — Education Cooperation Programme (ICI-ECP). Also, South Korea and the EU cooperate in the cultural field through a protocol on cultural cooperation under the EU-ROK FTA. In science, they have arranged the Agreement on the Scientific and Technological Cooperation (2007) and decided to cooperate on research related to ICT, nanotechnology, health/bio, energy and satellite navigation. Both can work together to solve energy problems, as the EU is a leading energy consumer and South Korea is the 12th largest country of greenhouse gas emission.

An uncertain future for the EU

Now, the EU faces a number of uncertainties. The EU has an advantage as an economic and political union of 28 European countries. However, the opinion on the union is split among various countries in the EU. This is because of a strong unity that limits each country’s sovereignty, while  maintaining the union can place an economic burden to some of the EU countries.

Last year, a majority of British citizens voted for the United Kingdom (UK) to exit from the EU. The process of ‘Brexit’ is still in the process of being completed but should be concluded in two years. This year, in the first round of the French Presidential election, the right-wing politician Marine Le Pen got 21.3 percent of the vote, slightly less than the leading vote getter Emmanuel Macron at 24.01 percent. Le Pen has said that if she wins the election, she will seek to pull France out of the EU or redenominate France’s debt in franks, placing the euro at risk.

On the other hand, this wave to exit the EU cannot easily break the union because many of the EU leaders and European politicians are trying to maintain the union. Last January, German Chancellor Angela Merkel said Britain cannot do ‘cherry picking’ during Brexit and urged the unity of the other EU members. Two major French parties, the Socialist Party and the Republicans, along with outgoing President Francois Hollande, declared their support for Macron who is a pro-EU politician and received 64% support from the French people in an initial poll after the first round of the French presidential election.

Stability in the EU matters for South Korea as Germany, France, the UK and Italy are top four export markets for South Korea as they account for 43 percent of the Korea’s export to Europe.

The most urgent task for Korea is to continue relations with the EU as well as the UK.

Amid the crisis of the EU, South Korea should try to maintain a ‘win-win’ relationship with European countries. Fortunately, the EU President Jean-Claude Juncker said that Brexit would not have any impact on EU-ROK relations, and insisted that the EU would continue to keep bilateral cooperation with South Korea as a ‘trustworthy’ partner.

In addition, South Korea will need to build new economic ties with the UK as it exits from the EU. A report by the Korea Institute for International Economic Policy estimated that Brexit will cause a 0.5-0.8 percent decrease in Korea’s economic growth rate in the short-run if South Korea does not sign a UK-ROK FTA. However, in the long-run, if South Korea has a FTA with the UK as well as the EU, the Korean economy is expected to experience more trade benefits than before. South Korea and the UK sent positive signals to each other in a meeting between the Korean Foreign Minister and the British Ambassador to Korea, indicative that they would reinforce economic relations between the two countries.

The EU is an important partner for South Korea

When the new Korean administration takes office, the EU-ROK FTA revision and the UK-ROK FTA negotiation will be on the docket. They must not forget that the EU is an important global partner for South Korea and the EU-ROK FTA and other agreements are the basis of the relationship.

The new administration will also need to closely observe the situation in the European Union. First of all, when the UK exits from the EU, South Korea will need to reaffirm ties with the UK as an important partner on trade and security issues, while keeping in mind that a strong partnership with the EU and the UK would help South Korea economically, politically as well as socially.

Gwanghyun Pyun is currently an Intern at the Korea Economic Institute of America as part of the Asan Academy Fellowship Program. He is also a student of Sogang University in South Korea. The views expressed here are the author’s alone.

Photo from the European Parliament’s photostream on flickr Creative Commons.

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ASEAN -Korea Relations Under the Next South Korean Administration

This is the second in a series of blogs looking at South Korea’s foreign relations in the run up to the next Korean administration taking office on May 10. The series also includes blogs on relations with North Korea, the United StatesChina, Japan, the European Union, Russia, the Middle EastLatin America, and Africa.

By Patrick Niceforo

Since establishing a Sectoral Dialogue Partnership with the Association of Southeast Asian Nations (ASEAN) in 1989, South Korea has rapidly expanded its diplomatic ties, economic partnerships, and development assistance efforts in Southeast Asia. In that time, trade between South Korea and ASEAN has expanded from $26.8 billion to $118.8 billion. As ASEAN continues to develop economically, the next South Korean administration will look to build on the success of prior administrations in growing economic ties with this increasingly vibrant region.

South Korea’s diplomatic relationship with ASEAN extends beyond its bilateral relationship with the ASEAN member states. Since 2012, South Korea has maintained an Embassy in Indonesia specifically for ROK-ASEAN relations. The establishment of the ROK-ASEAN Embassy was consistent with former President Lee Myung-bak’s “New Asia Initiative,” which called for increased levels of official development assistance (ODA), expanded trade networks, and multilateral cooperation on global issues such as climate change and disaster management. In addition to having bilateral FTAs with Vietnam, Indonesia, and Singapore, South Korea is also signatory to a Free Trade Area (AKFTA) with all of ASEAN which helps to facilitate and expand economic, trade, and investment cooperation in the region. South Korea has also gradually stepped up its ODA to Southeast Asia over the years.In 2015, about one quarter of South Korea’s overall $1.9 billion in ODA went to Southeast Asia, more than twice what it provided to the region in 2010.

South Korea can look forward to developing its role in regional trade through the ASEAN-driven Regional Comprehensive Economic Partnership (RCEP). RCEP is an agreement that, in addition to ASEAN member states, includes South Korea, China, Japan, India, New Zealand, and Australia. With negotiations launched in 2012, RCEP covers areas such as trade in goods and services, foreign investment, and dispute settlement. As the next South Korean administration comes to office it will need to prioritize RCEP and its negotiation strategy, as the deal could be signed as early as mid-2017.

Tourism from ASEAN

A potential opportunity for South Korea is attracting more international tourism from Southeast Asia. The number of Chinese tourists in South Korea has plummeted as a direct result of THAAD, with a 40 percent drop in March. This is concerning given that China contributes nearly half of South Korea’s foreign visitors. According to the LG Economic Research Institute, Chinese tourists spent $13.7 billion in South Korea in 2015, over 62 percent of its foreign tourism revenue. However, because ASEAN and South Korea jointly designated 2017 as the ASEAN-ROK Cultural Exchange Year, there are already plans to increase youth exchange programs and foreign investment. South Korea could capitalize on these programs to develop and expand sustainable tourism with its ASEAN partners. Generally speaking, larger numbers of tourists from ASEAN member countries have been traveling to South Korea over time. While Southeast Asian tourists are unlikely to replace the depleted numbers of Chinese tourists in South Korea, increased tourism could at least help alleviate the problem while also contributing to South Korea’s overall mission of expanding cultural exchange.

Patrick Niceforo is a graduate student at the Middlebury Institute of International Studies and an intern at KEI. The views expressed here are the authors’ alone.

Photo from Nicolas Mirguet’s photostream on flickr Creative Commons.

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Trade in Services Data Contributes to More Accurate Picture of the U.S.-Korea Trade Relationship

By Phil Eskeland

Yesterday, we looked at the possibility of renegotiation of the Korea-U.S. Free Trade Agreement (KORUS FTA) in light of the recent release of the President’s National Trade Policy Agenda for 2017.  The President’s trade agenda included two primary points of reference to rest its case that KORUS agreement did not produce the outcome that the American people expected from the agreement:  the value of U.S. goods exported to South Korea fell by $1.2 billion and the total value of U.S. imports of goods from Korea grew by $13 billion, resulting in a “dramatic increase in our trade deficit with that country.”

As mentioned in the previous blog post, the U.S. merchandise trade deficit with Korea actually declined in 2016, as compared to the previous 2015 level.  Nonetheless, earlier this morning, the Foreign Trade Division at the U.S. Census Bureau revealed a more complete picture of the U.S.-South Korea trade relationship because services trade data for the 4th Quarter of 2016 was included in their monthly release.  U.S. services exports to Korea hit a record level of $21.55 billion in 2016, which contributed to producing the highest trade surplus in services ($10.7 billion) for the United States in the history of U.S.-South Korea trade relations.

KORUS Graph 2

Thus, instead of a decline of U.S. exports to Korea, the latest trade statistics shows that total exports of both goods and services to Korea from the U.S. increased by $2.05 billion from 2011 and 2016.  As a result, the total trade deficit between the U.S. and Korea in 2016 was $17.46 billion, not $27.6 billion.  This combined goods and services trade deficit was a decline from the 2015 level.  U.S. imports of both goods and services from Korea also dropped from 2015 levels.

Though manufacturing is important to the nation’s economy, this should not mean the service sector’s contribution to the GDP should be downplayed or ignored.   Whereas the effect of the trade balance on the economy is debatable, it is also critical to include the full panoply of statistics and information in order to have an informed discussion on the future of the KORUS FTA.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own. 

Photo from CosmicDust’s photostream on flickr Creative Commons.

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Is Renegotiation of the Korea-U.S. Free Trade Agreement on the Horizon?

By Phil Eskeland

Last week, the Office of the U.S. Trade Representative (USTR) released the President’s National Trade Policy Agenda for 2017.  It should not be unexpected that the Trump Administration seeks a new approach on U.S. trade policy because it was a top tier issue on the presidential campaign trail, particularly for businessman Donald Trump.  This reflects his long-held beliefs on this subject and the policy positions of his key trade aides.

However, while there are a few disparaging comments in the USTR document about the Korea-U.S. Free Trade Agreement that cherry-picks certain statistics to portray the deal in the most negative light, there is no mandate for a renegotiation or even a review of the agreement.  All that is required in this new agenda is a request for “a major review of how we [the U.S. government] approach trade agreements.”  This is more of a forward-looking document as to how “future trade agreements can work for all Americans more effectively than they have in the past.”  This not to say that KORUS or any other FTA is exempt from a review or renegotiation in the future.  The document reveals a future intention to submit a more detailed report on the President’s trade policy agenda once the U.S. Senate confirms a new USTR, so no one should rest at ease.

Nonetheless, the Trump’s Administration trade policy agenda document rests its entire criticism of the KORUS FTA on the decline of U.S. exports of goods to Korea from 2011 to 2016 and the increase of U.S. imports of goods from Korea over this same time period that resulted in more than doubling the trade deficit in goods.  This approach does not include several nuances in U.S.-Korea trade relations.

First, the agreement is not fully implemented yet; it is at its half-way point.  While it is debatable to think of trade as a competition with winners and losers, using the trade balance as the sole metric of success, all agree that no one decides who wins a game at half-time.  If that was the case, then the Atlanta Falcons would have won the Super Bowl.

Second, by including the total value of all goods traded between the U.S. and Korea in the trade policy agenda document, there is a misleading supposition that every product grown or made in America is covered by the KORUS FTA.  In reality, there are still some items that comprise a significant value of total U.S. exports to Korea which did not benefit from the agreement upon implementation.  Some trade benefits for U.S. producers and providers are phased-in over time.  There are some items not covered by the agreement at all and some goods that already traded duty free.  Nonetheless, according to the Korea Customs Service, U.S. exports of FTA beneficiary goods increased by 18 percent between 2011 and 2015.  In contrast, U.S. exports of items not covered by the KORUS FTA decreased by 20 percent over that same time period (see chart).  Thus, any decline in total U.S. exports of goods to Korea cannot be attributed to KORUS.  As the independent U.S. International Trade Commission concluded, the KORUS FTA is estimated to have improved the bilateral merchandise trade balance by nearly $16 billion in favor of the United States.  In other words, if the KORUS agreement was not in place, the U.S. merchandise trade deficit would be $44 billion in 2015 instead of $28.3 billion.

KORUS Graph

When looking more closely at the U.S. trade deficit, the statistic overlooks the 2.3 percent decline in the annual bilateral merchandise trade imbalance between the U.S. and Korea in 2016 plus the decline of Korean imports into the United States.  It also disregards the $4.27 billion in U.S. merchandise exports to Korea in December 2016 (second highest monthly level in the history of U.S.-Korea trade) despite the challenge of the stronger U.S. dollar.  While it is premature to conclude that this trend will continue, Korea recognizes the need to purchase more American products, as evidenced by their desire to access more energy supplies from the United States.

Finally, the Trump Administration should also take into consideration the growing role of foreign direct investment from Korea.  According to SelectUSA, Korea’s investment in the U.S. has nearly doubled since 2011 to reach $38.2 billion in 2015, employing 45,100 workers in almost every state of the union.  These workers earn an average compensation package of salary and benefits of over $92,000.  More Korean investment may be on the way with recent announcements by Hyundai, Samsung, and LG.  Any re-examination of KORUS should also factor in the possible effect on investment flows from the Republic of Korea into the United States.

While it is the prerogative of every new administration to review past policies, the KORUS FTA has demonstrated its effectiveness in addressing the main concern expressed by the proposed trade policy agenda – mitigating the bilateral merchandise trade deficit between the U.S. and Korea.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.

Photo from the Port of Tacoma’s photostream on flickr Creative Commons.

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What Does New Trade Data Portend for U.S.-Korea Trade Relations?

By Phil Eskeland

Earlier today, the Foreign Trade Division of the U.S. Census Bureau released the latest statistics on U.S. international trade data.  While the overall U.S. trade deficit in merchandise goods with the world increased by $1.9 billion or 0.4 percent, the bilateral trade deficit between the U.S. and South Korea declined by $647 million or 2.3 percent.  This decline was a result of a disproportional decline of the value of Korean imports into the United States.  For the United States, American exports to Korea surged in December, reaching a record level of $4.3 billion for 2016, despite the rising value of the U.S. dollar, while Korean imports into the U.S. declined to $5.47 billion in December, a decrease from the $5.8 billion value in November.

As a result, the U.S. may be turning a corner with respect to the rising bilateral trade deficit between the U.S. and the Republic of Korea (ROK).  The chart below shows the trend in goods trade between the U.S. and Korea since the year before the Korea-U.S. Free Trade Agreement (KORUS FTA) was implemented.  More data will be made available next month when the 2016 4th Quarter statistics on services trade will be released.  Historically, the U.S. has always generated a trade surplus in services trade with Korea, and therefore the overall bilateral trade deficit for 2016 between the U.S. and Korea may be even less.  Only time will tell if this is just a one year respite from the trend in recent years or if this is a foreshadowing of a new development in U.S.-Korea trade relations.

U.S.-Korea Trade 2016

Source:  Foreign Trade Division, U.S. Census Bureau

Thus, while there is good news with respect to the merchandise trade deficit between the U.S. and Korea, the economic relationship between the U.S. and Korea is more than just the value of imports and exports with the trade balance figure as the sole determinant as a measure success or failure.  As mentioned in previous blog posts, there are now over 350,000 U.S. workers dependent upon exports to Korea (a 24 percent increase or 87,000 new jobs since 2009); Korea has more than doubled its investment in the United States since 2011 and is now the fifth fastest-growing source of Foreign Direct Investment (FDI) into America, employing 45,100 U.S. workers, (up 22 percent or 10,000 new jobs since 2011); and the average annual compensation of U.S. workers employed in firms with investment from Korea have increased 11 percent from 2011 to reach $92,000.  Thus, as the Trump Administration deals with trade, it is critical to remember that nearly 400,000 U.S. workers directly owe their employment to Korea trade and investment in America.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.

Photo from Wilson Hui’s photostream on flickr Creative Commons.

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President Trump Praises Samsung for Plan to Manufacture in the U.S.

By Jenna Gibson

“Thank you, @Samsung! We would love to have you!” Donald Trump wrote on his personal Twitter account, linking to a story about a possible plan for the tech company to build a factory for home appliances in the United States.

The article called the announcement by Samsung “A win-win,” saying that “Companies can grab headlines with news of even considering bringing production to the U.S., and the Trump White House benefits from the ability to take credit. These moves may not add up to significant job growth, but it’s hard to beat the PR.”

Trump’s tweet, which was sent only half an hour after the article was posted, may lend credence to their theory.

Post-inauguration, Trump hasn’t yet turned his attention toward Korea, focusing mainly on domestic issues and trade with neighboring Mexico. But trade with the ROK was a regular component of his campaign addresses.

“We spend a fortune on defending South Korea. Now I order thousands and — thousands of television sets here, they come from South Korea. They make so much.  They’re making a fortune.  They’re a behemoth,” Trump said during the CNN-Telemundo Republican debate last February.

Samsung – which makes some of the televisions Trump may be referring to – already manufactures semiconductors at a plant in Austin, Texas in addition to its facilities in South Korea. Samsung has the largest Korean investment in the United States, and Korea as a whole is the 5th fastest growing source of Foreign Direct Investment into the country.

Trump Tweet

The electronics giant is hardly the only Korean company to consider moving more production to the United States in an effort to head off criticism from the new President – last week, Hyundai Motor Group announced that they plan to increase U.S. investment by 50 percent over the next five years, and may build a new plant to supplement the factory they currently have in Montgomery, Alabama. The company also applied for membership with the American Chamber of Commerce in Korea this year for the first time since 2008.

LG is also considering building a new plant in Tennessee for its TV and home appliances. “This is something that has been under consideration for years at LG, but the current political situation is simply accelerating that timeline for a decision,” according to a source close to the company told Reuters.

On a larger scale, the Korean government has indicated that they will encourage more imports from the United States to balance some of Seoul’s trade surplus. As part of this plan, the finance ministry announced that they will begin importing more U.S. shale gas to meet the country’s energy needs.

Whether Samsung goes through with plans to begin manufacturing appliances in the United States or just wants to stave off the ire of the White House remains to be seen. But the 60,000+ likes Trump’s one tweet got within hours of posting certainly can’t hurt either way.

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Michael Newman’s photostream on flickr Creative Commons.

 

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U.S.-Korea Relations: The Obama Years

By Troy Stangarone

Summing up a presidential legacy is a complex endeavor. There are countless details that are either unknown or just too difficult to fit into the flow of a single piece. There are choice that in the immediate term may seem wise, but in the hindsight of years less so. While mistakes today may come to be viewed as prudent years on. This is even more the case when it deals with only a single aspect of one part of the presidency, the relationship between the United States and the Republic of Korea. A relationship that while vibrant and strong, is also inevitably tied to both countries’ relationship with the Democratic People’s Republic of Korea.

For the last eight years, we’ve seen a relationship that has grown beyond the Cold War confines of the threat from North Korea and that has begun to evolve into more of a partnership that works together both in the region and on the global stage. This shift was possible in large thanks to the relationship that the Obama administration inherited and the partners they had to work with in South Korea under the Lee Myung-bak and Park Geun-hye administrations.

When President George W. Bush handed U.S.-Korea relations over to President Barack Obama on January 20, 2009, he handed over an alliance that was in good shape. While the relationship between the United States and South Korea had been rocky at times during the early years of the Bush administration, even during those difficult times progress was made on the alliance. As a result President Obama inherited an alliance that was already growing and changing as Bush administration left a legacy of a completed but unratified free trade agreement with South Korea (KORUS FTA), and agreements to move U.S. Forces Korea from Seoul to Camp Humphreys near Pyongtaek and to transfer wartime control of South Korean forces back to the South Korean government.

Over the last eight years, the Obama administration has built on the foundations of the alliance it inherited. While the alliance remains rooted in the United States’ commitment to defend South Korea against North Korean aggression, the Obama administration has worked with South Korea to move the alliance beyond deterring North Korea. Perhaps most critically in this was the administration’s support for Lee Myung-bak administration’s efforts to see South Korea contribute more to the global community. As part of these efforts, the Obama administration supported Seoul’s efforts to host the G-20 leaders summit in 2010 and asked South Korea to host the second Nuclear Security Summit as part of the Obama administration’s efforts to enhance global nuclear security.

Beyond summits, the Obama administration has sought to increase cooperation with South Korea in a wide range of areas that are now referred to as the New Frontier issues and include areas such as cyber security, climate change and global health. As an example, in the area of global heath South Korea worked with the United States and other nations to deal with the Ebola outbreak in Africa in 2014.

In the economic relationship, the Obama administration engaged South Korea in additional negotiations to address concerns related to trade in autos with the KORUS FTA. After reaching an agreement, the KORUS FTA went into effect on  March 15, 2012. The administration also negotiated a new 123 agreement to continue civilian nuclear cooperation between the United States and South Korea.

At the core of the alliance, defense cooperation, the administration has proceeded and largely concluded the efforts begun by the Bush administration to move U.S. troops from Seoul to Camp Humphreys. It also updated the decision to transfer wartime operational control to South Korea by moving the agreement from a deadline based transition to a conditions based agreement that would implement the transition only once South Korea has developed the intelligence and command infrastructure necessary to undertake operational control of forces.

If the relationship with South Korea has been a boon for Obama, than it is the relationship with North Korea where the long eye of history may have more to say in the years to come. While he inherited a North Korea that had already tested a nuclear weapon, North Korea has gone on to conduct four additional nuclear tests during his time in office and he will pass along to the Trump administration a much more dangerous North Korea than he inherited.  Many have criticized the Obama Administration’s “strategic patience” approach, but alternatives are limited if the goal is a denuclearized North Korea within a short time span.  There may have been other tools that the Obama Administration used over the past eight years that are not in the public domain to prod change in North Korea that only time and change in North Korea may tell.

Much as in the case of South Korea, leadership has likely played a role in the deteriorating situation with North Korea. If President Obama was fortunate to have willing partners in South Korea, the death of Kim Jong-il left a much more aggressive Kim Jong-un in charge of North Korea. While Kim Jong-il famously slapped away Obama’s inaugural offer of talks, it is unclear if diplomacy could have played much of a role in convincing Kim Jong-il or Kim Jong-un to roll back North Korea’s nuclear program.

Shortly after Kim Jong-un came to power, the Obama administration negotiated a moratorium on missile launches that North Korea would soon violate and despite efforts by the Park Geun-hye administration in South Korea to build relations with North Korea Kim Jong-un instead chose to greet her administration with confrontation through an ICBM test, a nuclear test, and the withdrawal of North Korean workers from the joint North-South industrial complex in Kaesong. It is perhaps telling that a U.S. administration that, despite domestic opposition, negotiated a nuclear deal with Iran and reopened relations with Myanmar and Cuba found North Korea an unwilling partner for improving relations.

With the path to negotiations closed the administration instead pursued a course of increasing pressure on North Korea. It’s perhaps most significant achievement on this end was the development of increased cooperation with China on sanctions in the United Nations. While the robust sanctions negotiated after North Korea’s fourth nuclear test in January of 2016 were found to have been flawed, those sanctions were revised after North Korea’s fifth nuclear test to close loopholes and being to bring real pressure on North Korea.

In addition to international sanctions, the administration took advantage of new sanctions authorities granted to it by Congress, though perhaps reluctantly and not to the degree critics of the administration might have hoped. Perhaps most significantly on this front, the administration has sanctioned both Kim Jong-un and his sister personally for their roles in human rights violations in North Korea.

Perhaps the last legacy item for the Obama administration in regards to North Korea has been its efforts to increase the deterrent capabilities of the alliance. It reached an agreement with South Korea to expand the range of South Korean missiles to allow Seoul to be able to target any area of North Korea and to help facilitate its “kill chain” concept of being out to take out North Korean nuclear facilities prior to an imminent attack. On the more controversial side, it also worked with Japan to develop new defense guidelines that would allow Japan to play a more active role if the U.S. were to come under attack and which would also aid in a contingency on the Korean peninsula and for the deployment of the Terminal High Altitude Area Defense system to protect parts of South Korea against North Korean missile attacks.

For President Obama it will be a strong legacy he leaves with South Korea, a nation that he visited more often than all but France, the UK, Germany, and Mexico and developed close personal relationships. It is North Korea where time may judge him more harshly, or depending on the actions taken by Kim Jong-un and the Trump administration come to view him as prudent. By his own standards, President Obama has done well.  He once described his foreign policy philosophy as looking for singles and doubles, and “don’t do stupid s@#%.” By that standard, President Obama has managed U.S.-Korea relations well. He’s made progress on a range of issues and avoided serious mistakes, and despite challenges presented by North Korea, he stands to hand the alliance over to his successor, Donald Trump, much as President George W. Bush did to him, in good shape.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from The White House’s photostream on flickr Creative Commons.

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About The Peninsula

The Peninsula blog is a project of the Korea Economic Institute. It is designed to provide a wide ranging forum for discussion of the foreign policy, economic, and social issues that impact the Korean peninsula. The views expressed on The Peninsula are those of the authors alone, and should not be taken to represent the views of either the editors or the Korea Economic Institute. For questions, comments, or to submit a post to The Peninsula, please contact us at ts@keia.org.