Tag Archive | "Korus FTA"

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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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.

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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.

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What the U.S. Rejection of TPP, Brexit, and a New Trade Agreement May Mean for Korea

By Donald Manzullo

President Donald Trump did not take long in fulfilling his campaign promise to pull out of Trans-Pacific Partnership (TPP).  Just three days into his presidency, he formally withdrew the United States from the TPP and began to honor his pledge to change the way the United States does trade.

The P4 Trade Agreement started the chain reaction that formally led the U.S. to get involved in what became TPP:  Brunei, Chile, New Zealand and Singapore signed a free trade agreement effective 2006 that eventually led to the TPP talks to expand the four nation agreement to 12 or more if nations would adopt the standards and agreements of the final document.  In addition to the original four, eight other nations eventually joined the talks:  Japan, Malaysia, Vietnam, Australia, Mexico, Canada, Peru, and, of course, the United States.   Korea expressed interest but ultimately did not join in time to be a part in this first round of the TPP, though it supported the document and was prepared to join as soon as possible after all the other countries implemented the agreement.  The TPP would have linked together a free trade agreement with countries already responsible for 40 percent of world trade, removing around 18,000 tariffs in services and agricultural and industrial goods.

I was involved in the preliminary TPP advisory discussions, as Chairman of the Subcommittee on Asia and the Pacific of the House Foreign Affairs Committee, when I led what turned out to be the largest delegation of U.S. Members of Congress to visit New Zealand and Australia.  Our delegation joined by principles from around the world discussing the TPP.  As a member of Congress who voted for every free trade agreement presented before the House of Representatives, the TPP was particularly intriguing because of the number of countries involved.  Congress had never debated and passed a plurilateral FTA with that many potential partners.  We were in Christchurch, New Zealand for two days of meetings and discussions.  It is hard to forget the second day:  a few hours after our plane left Christchurch on February 22, 2011, a massive earthquake shook the Christchurch vicinity, killing 185 people.

It should be noted that TPP in its final form had some very serious U.S. detractors, beyond the usual opponents of trade from the labor and environmental communities, including the U.S. pharmaceutical industry, particularly the intellectual property rights concerns among biologics firms.  Biologics drugs substitute biological material in place of the traditional chemicals, which is at the cutting edge of pharmacology and other uses.

Even though Trade Promotion Authority (TPA), which gave the president the ability to submit the final TPP agreement to both houses of Congress without the opportunity to amend the deal, passed Congress, the House narrowly passed this legislation by a vote 218 to 208 (House vote #374, June 18, 2015).   While the Senate passed TPA by a larger margin, by a vote of 68 to 37 (Senate vote #218, June 23, 2015), that preliminary vote for TPA did not guarantee that the TPP would pass Congress when presented.

Meanwhile, the presidential elections and fiercely fought congressional races (such as Ohio Senator Rob Portman’s bid for re-election) resulted with Trump openly campaigning against TPP and Secretary of State Hillary Clinton and others changed their mind after first supporting the agreement.  The policy of free trade is now in retreat.

President Trump says he embraces bilateral trade agreements as opposed to more complex multilateral deal.  That’s encouraging because he could oppose all free trade agreements.  While he has spoken negatively of the Korea-U.S. Free Trade Agreement (KORUS FTA) on the campaign trail as a stalking horse for the TPP, the agreement meets all of President Trump’s criteria for a good FTA.  The KORUS FTA (1) is a bilateral agreement; (2) has increased U.S. jobs; (3) has increased the compensation for U.S. workers; and (4) has helped reduce the merchandise trade deficit.

More particularly, Trump and the new Prime Minister of the United Kingdom, Theresa May, are now discussing a FTA between the U.S. and the U.K. that would lower or eliminate what tariffs exist between the two countries.  In fact, Prime Minister May is scheduled to speak before the normally closed House of Representatives Republican retreat.  That is interesting because the American colonies opposition to Great Britain’s taxes on tea and other products precipitated the Revolutionary War.  Now, it’s the same two countries who are at the beginning of a new paradigm of trade policy.  Great Britain, fresh from the Brexit vote, and the U.S., just days into the anti-free trade Trump Administration – two former enemies which fought a war over the issue of trade – may have each other as partners in each country’s first free trade agreement since their respective seismic change in domestic politics.

Like it or not, welcome to the new world of free trade.  How the Trump administration will handle the talks with the U.K. and the renegotiation of the North American Free Trade Agreement (NAFTA) should provide insight to Korea into what this new world of trade will look like in the coming months and years ahead.

Donald Manzullo is President and CEO of Korea Economic Institute and former Member of U.S. Congress (1993-2013). The views expressed here are the author’s alone.

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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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10 Issues to Watch for on the Korean Peninsula in 2017

By Mark Tokola, Phil Eskeland, Troy Stangarone, Jenna Gibson, Kyle Ferrier, and Juni Kim

The Korean peninsula was dominated by unexpected events in 2016. North Korea began the year with a nuclear test that merely foreshadowed a year of significant advancements in its nuclear program rather than its traditional pattern of using tests to provoke a cycle of crisis and negotiations. In response, the Park Geun-hye administration closed the Kaesong Industrial Complex in what would become the first of a series of significant moves to tighten sanctions on North Korea bilaterally by a series of nations and through the United Nations.

On the political front, 2016 saw the surprise election of Donald Trump as president of the United States on a platform that may remake parts of U.S.-Korea relations while redefining the role of the United States in East Asia. Closer to home in Seoul, South Korea was rocked by a political crisis that led to the impeachment of Park Geun-hye.

As 2017 begins the consequences of those events and others from 2016 will begin to play out on the Korean peninsula and Kim Jong-un has again begun the year with a shock announcing that North Korea is close to testing an intercontinental ballistic missile (ICBM). With that in mind, here are 10 issues to follow that will have an impact on the Korean peninsula in the year to come:

Political Dynamics and the Presidential Election in South Korea

Perhaps no issue will have more impact on the Korean peninsula this year and in the years to come than the resolution of the current political crisis in South Korea. Depending on when and how the Constitutional Court rules on the impeachment of Park Geun-hye, South Korea could have a new president as early as this spring or enter into a period of extended political uncertainty with President Park remaining in power until February 25 of 2018.

These political dynamics have implications for South Korea and the peninsula beyond whether Park Geun-hye leaves office early or serves the remainder of her term. The political uncertainty around the impeachment means that needed economic reforms will likely be delayed and that policies enacted by the interim administration or late in the Park administration could be subject to quick reversal after the question of impeachment is resolved. The current environment could also lead to a move towards constitutional reform, an issue that had already been gaining steam prior to the move towards impeachment.

If President Park’s impeachment is upheld a snap 60 day campaign could change the dynamics of the election and favor a candidate who might not ordinarily have performed as well under an ordinary campaign. It may also aid a move towards more populist positions, as is becoming an increasing trend around the world, but in the case of South Korea may come from left rather than the right as we have seen in Europe and the United States.

The election also holds the potential to see a significant shift in policy related to North Korea and Japan, among other issues to watch in 2017.

The Trump Administrations Foreign and Security Policy in East Asia

For the first time since the end of the Korean War, there is significant uncertainty on how U.S. foreign and security policy will develop in East Asia. After decades of bipartisan understanding of both the benefits of the region to the United States and the basic policies that should be put in place to promote U.S. interests, the Trump administration will come into office having campaigned for significant change in U.S. policy and with an air of uncertainty in the region on the shape of U.S. policy to come.

In the campaign, President-elect Trump seemed to place a greater emphasis on international economic issues and question the utility of U.S. alliances and whether countries such as South Korea were contributing enough financially to the deployment of U.S. troops. He also suggested a willingness to withdraw U.S. troops and allow South Korea and Japan to defend themselves with nuclear weapons.

Since the election, we have seen President-elect Trump reaffirm the United States commitment to defend South Korea, but also a willingness to change the nature of the U.S. relationship with Taiwan, potentially increasing tensions with China. For the Korean peninsula, the priorities the administration sets in the region, including whether China or North Korea will be a priority, as well as whether it chooses to purse those policies through negotiation or confrontation will have significant impact on events on the Korean peninsula, including how willing China is to cooperate in pressuring North Korea to denuclearize.

As the Trump administration sets out its new policies, we should expect there to be significant changes that could unsettle the region early in the administration. However, as events and structural challenges in the region necessitate, there will likely be a shift towards a more traditional U.S. foreign policy in the region.

Trump Administration Asia Economic Policy

During the campaign, President-elect Donald Trump castigated U.S. trade policy, including the Korea-U.S. Free Trade Agreement (KORUS FTA).  While the KORUS FTA was cited as an example of a “disastrous” trade deal, candidate Trump did not threatened to withdraw or renegotiate the agreement, as he did with other FTAs.  His first 100 days agenda only reiterated his pledge to withdraw from the Trans Pacific Partnership (TPP).

While the KORUS agreement may be out of the limelight, there are indicators to watch for to see the future of U.S. trade policy.  First, his senior appointees for various posts will determine the extent of Trump’s economic nationalism.  He has nominated Wilbur Ross, a private equity billionaire who specializes in restructuring failed companies, particularly several in “Rust Belt” industries, as Secretary of Commerce, and noted “fair” trade attorney Robert Lightizer, to serve as the U.S. Trade Representative.  In addition, Trump has appointed two individuals to fill newly created positions within the White House – noted trade skeptic and economist, Peter Navarro, as the Director of the National Trade Council, and Jason Greenblatt, who currently is Executive Vice President of the Trump Organization, as the Special Representative for International Negotiations.  It is unclear how all these four individuals, along with free trade advocate Rex Tillerson, who was nominated by Trump to serve as his Secretary of State, will interact to shape a unified trade policy, and how much real power and authority each one of these individuals will possess.

Second, in early February, the annual trade statistics will be released by the U.S. government.  The Year to Date (YTD) trade deficit between the U.S. and the ROK in goods is slightly outpacing last year’s level ($24.07 billion for 2016 vs. $23.997 billion for 2015).  If this trend continues, there could be a renewed attention on KORUS.

Third, even if there is not a direct confrontation of KORUS in the near-term, the Trump plan to focus most of their attention on fixing agreements with Mexico and enforcing trade laws before negotiating any new bilateral deals could have ancillary spillover effects on Korea.  China is Korea’s top trading partner and Mexico is Korea’s ninth largest export market.  Mexico is also becoming a major destination for Korean foreign direct investment.  Thus, while KORUS maybe out of the cross-hairs, actions by the Trump Administration affecting other trading partners could have negative effects for the Korean economy.

North Korean Behavior in Response to a New Political Environment

With a new administration in the United States and the prospects for a new administration in South Korea this year, there is an expectation that North Korea may test the alliance and Kim Jong-un has already suggested that he will conduct an ICBM test.  Observers have tried for years to explain the timing of North Korean nuclear tests, missile tests, and other provocative acts on the basis of North Korean political anniversaries, foreign elections, and other external events such as international summits or Olympic Games. The historic correlations are weak.  It may simply be that North Koreans test their weaponry when it is time to do so on an engineering schedule.  When they are ready to test, they test.  They might wait a matter of days or weeks if tests would interfere with a major political event such as a bilateral meeting, as we would do, but that would nudge the schedule, not drive it.

The tempo of testing has picked up since Kim Jong-un came to power.  Nuclear and missile test are happening much more often than they did during the time of Kim Jong-il.  This might be occurring because Kim Jong-un is still trying to cement his power and has tied his personal prestige to weapons testing.  It may be because North Korea wants to get as far as it can, as fast as it can, before the U.S., South Korea, Japan, and China take stronger steps to try to put an end to its quest for a nuclear arsenal.  It might also reflect Kim Jong-un’s personal impatience.

Will North Korea be a Trump Administration Priority?

U.S. Administrations have limited ability to set foreign policy priorities.  It is a useful exercise to try to set priorities on the grounds that unless you know where you want to go, you are unlikely to get there.  But, foreign policy is unavoidably reactive because decisions by foreign leaders and non-state actors, natural disasters, accidents, and miscalculations require responses.  British Prime Minister Harold Macmillan was quoted as answering a journalist’s question of what Prime Ministers fear most by saying, “Events, dear boy, events.”

Discounting events, North Korea should be a high foreign policy priority for the Trump Administration.  North Korea has threatened military action against the United States, South Korea and Japan and is getting closer to having a nuclear weapon that could strike the U.S. west coast.  That in itself should not be considered a watershed moment, North Korea can already threaten South Korea, Japan, and hundreds of thousands of Americans, military and civilian, living within the range of North Korean military strikes.  North Korea’s belligerency, possible instability, and grotesque human rights abuses should be of great concern to countries in the region, the U.S., and the international community.  A concerted, coordinated policy towards North Korea is necessary.

Are Sanctions Working?

The sanctions enacted this year on North Korea constitute the toughest and most comprehensive framework to date. New information in 2017 will help to gauge whether these measures are working as intended and how they can be strengthened, with China’s enforcement of new sanctions playing a key role. The effectiveness of improvements made to UN sanctions in resolution 2321 and U.S. secondary sanctions targeting financial institutions facilitating Kim Jong-un’s pursuit of hard currency greatly depends on Beijing’s willingness to cooperate with Washington. However, President-elect Donald Trump’s initial approach towards China suggests heightened tensions in the relationship over other issues may pose significant challenges for cooperation on sanctions in 2017.

Nevertheless, the continued use of sanctions as a tool on North Korea may be in question. Several candidates in South Korea’s presidential elections next year favor economic engagement with North Korea. South Korea’s return to engagement would greatly undermine the cohesion of UN sanctions, likely precipitating Russia and China—the most reluctant supporters of sanctions and North Korea’s most influential economic partners—to abandon their support. Even if these candidates are unsuccessful in their presidential bids, should the new sanctions have a limited impact in the first half of 2017 transitioning leaders in the U.S. and South Korea may consider other policy alternatives.

Special Measures Agreement/Burden Sharing 

Ever since 1991, the Republic of Korea (ROK) has provided some financial support to offset the cost of stationing U.S. troops on the peninsula.  During the presidential campaign, Donald Trump questioned on several occasions the alleged low reimbursement for stationing U.S. troops abroad.

Later this year, Korea and the United States will begin negotiations on renewing the Special Measures Agreement (SMA), which is set to expire in 2018, that lays out the terms of the burden sharing arrangement.  Last April, General Vincent Brooks testified before the U.S. Senate that Korea pays approximately 50 percent of the total non-personnel costs of the U.S. troop presence on the peninsula.  Under the current SMA, Korea’s annual payment (in won) increases by the rate of inflation.

Just as in all negotiations, one side offers its most parsimonious offer and the other side counters with its proposal to bolster its own self-interest.  Over time, the two sides come together to reach an agreement.  Marine Corps General James Mattis, Trump’s nominee for Secretary of Defense, earlier criticized President Barack Obama for “saying that our allies are freeloaders.”  Not only does the ROK already share half of the burden of the stationing costs of the U.S. military on the peninsula, but this staunch U.S. ally also has a military draft with 625,000 active duty military personnel confronting North Korea; spends 2.6 percent of its GDP on its own defense (highest among any major European or Asian ally of the U.S); and 80 percent of South Korea’s imports of military equipment over the past five years have come from the United States.  South Korea is leagues above European members of NATO in terms of alleviating the defense burden of the United States.

SMA negotiations will be tough with the Trump administration, as they have been at times in the past.  However, these talks will not undermine the alliance.  The U.S. national interest will continue to inform policymakers that no U.S. troops should be withdrawn from the ROK until the threat from North Korea is resolved.

Will RCEP Be Finalized in 2017?

The failure of TPP has turned attention to the remaining mega free trade agreement in Asia: the Regional Comprehensive Economic Partnership (RCEP). Negotiations were due to have finished by the end of 2015, but have been bogged down by disagreements over a range of issues. However, the breakdown of TPP may prove to be the necessary push to conclude negotiations in 2017. China, the largest member economy and key driver of the deal, has vowed to accelerate talks and is already looking ahead to lead the Free Trade Area of the Asia Pacific (FTAAP), the next progression in the regional architecture.

RCEP members and even non-signatories, such as the U.S., stand to benefit from an Asia with fewer barriers to trade. Still, the deal’s avoidance of non-tariff barriers, while making consensus easier among sixteen diverse economies including Korea, offers limited gains from liberalization. If RCEP is concluded it may provide the foundation for slower and less ambitious regional integration

With RCEP in place, an emboldened Beijing could seek to displace Washington from its leadership role in the region on economic issues. However, the longer RCEP talks continue to drag on, the greater the opportunity for the U.S. to bolster its standing in Asia through bilateral agreements preferred by President-elect Donald Trump.

Will the Korean Wave Continue?

Last year was nothing if not a roller coaster for Korean cultural exports. The bombshell soap opera “Descendants of the Sun” broke records at home and abroad, raking in billions in direct and indirect profits. However, the second half of the year was marred by reports of a Chinese ban on Korean entertainment content because of Korea’s decision to deploy THAAD.

While there have been some instances that could raise suspicion, other events have proceeded as planned, indicating that this is not a blanket ban. It’s far more likely that some local organizers, skittish about the Chinese government’s harsh language on THAAD, decided not to risk a controversy. With THAAD set to be deployed later this year, this will deserve further attention as the deployment takes place.

Yet, interest in everything Korea continues to grow, and shows no sign of stopping. Cosmetics giant Amore Pacific saw a 26.7% year-on-year jump in overseas sales in Q3. And Korea already broke tourism records as of mid-November, with more than 15 million people visiting the country by that point.

It’s worth remembering that the word “hallyu” itself was originally a derogatory term created in China in the 1990s to push back against the influx of Korean media content. People have been predicting the downfall of the Korean Wave since then, yet it is stronger than ever. Expect this to continue in 2017.

Relations Between South Korea and Japan

Relations between South Korea and Japan remain as complicated as ever and 2017 could see uncertainty in the relationship. Despite the implementation of the 2015 Seoul-Tokyo agreement regarding the compensation of comfort women earlier this year, controversy and protests in South Korea have continued to overshadow the deal. In light of President Park Geun-hye’s recent impeachment, leading members of the South Korean opposition parties have increased calls for the government to reconsider the agreement. Potential presidential candidates Moon Jae-in and Ahn Cheol-soo have criticized the deal and may try to restructure the deal or scrap it entirely if elected.

Despite controversy over the comfort women agreement, South Korea and Japan have continued to strengthen their defense ties. Both countries participated in regular joint military exercises with the U.S. this year and started implementation of an intelligence sharing deal earlier this month. The deal allows for intelligence sharing between the two countries regarding North Korea’s nuclear and weapons programs. Controversy over historical issues between the two countries is unlikely to subside in the near future, but the shared North Korean threat provides avenues for greater security cooperation for South Korea and Japan. Needless to say, the next South Korean president will play an instrumental role in determining the future of the relationship.

Mark Tokola is the Vice President of the Korea Economic Institute of America, Phil Eskeland is the Executive Director of Operations and Policy,  Troy Stangarone is the Senior Director for Congressional Affairs and Trade, Jenna Gibson is the Director of Communications, Kyle Ferrier is the Director of Academic Affairs and Research, and Juni Kim is the Program Manager and Executive Assistant. The views expressed here are the authors’ alone.

Image designed by Jenna Gibson of the Korea Economic Institute of America with photos from the photostreams of Gage Skidmore, Stefan Krasowski, Herman Van Rompuy, Byoung Wook, and Korea.net on flickr Creative Commons.

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Has the KORUS FTA Cost the United States 100,000 Jobs?: Part 2 – A Look at U.S.-Korea Economic Relations

This is the second part of a two part series looking at the impact of the KORUS FTA on jobs in the United States. Part I can be found here.

By Troy Stangarone

In the first part of this series, we looked at how using trade surpluses or deficits in trade in goods might provide insight into how the KORUS FTA has performed in terms of jobs gained or lost in the United States. As we noted in that piece, estimates provided by EPI have overstated the impact of the KORUS FTA on jobs for multiple reasons. In this part, we’ll look at three additional factors to consider when thinking about the impact of the KORUS FTA on American jobs – trade in services, foreign direct investment, and items covered by the KORUS FTA.

Trade in Services

Services are an increasingly important part of international trade in terms of value and volume. However, they are left out of EPI’s estimates (and the administration’s) of the impact of the KORUS FTA on jobs, excluding more than 20 percent of U.S.-Korea trade. In addition to being a significant portion of U.S.-Korea trade, the United States has a surplus in services exports to Korea. Each additional $1 billion in services exports supported approximately 2,000 more jobs in 2015 than exports of goods according to data compiled by the U.S. Department of Commerce.

However, it should be noted that there are challenges in using services trade data. It tends to lag behind reports in goods data and it is more difficult to disaggregate the trade that is reflective of provisions covered by the KORUS FTA from those that are not, as we will do with goods later. Using yearly services trade data and Commerce estimates of jobs supported by services exports we can see that in 2015 services trade likely accounted for more than 18,000 jobs supported not accounted for by EPI’s estimates.

Foreign Direct Investment

Another important area of economic relations between the United States and Korea that is often overlooked in estimates of the impact of the KORUS FTA on jobs in the United States is how foreign direct investment (FDI) in the United States has changed since the agreement went into effect. Since the KORUS FTA came into effect, Korea’s level of FDI in the United States has doubled from $19.9 billion to $40.1 billion according to the Bureau for Economic Analysis. While statistics on jobs created from Korean FDI into the United States are only available through 2014, the number of Americans employed by Korean firms in the United States has grown by nearly 11,000.

In addition to supporting additional U.S. jobs, workers at Korean firms receive higher levels of compensation than the U.S. average and have seen an 11 percent growth in average compensation since the KORUS FTA came into effect. Average compensation at Korean firms rose from $81,851 in 2011 to $92,021 in 2014.

KORUS Job Estimates-01

Judging the KORUS FTA by the KORUS FTA

One of the limitations of looking at the change in the United States’ merchandise trade deficit with Korea since the KORUS FTA’s implementation is that the overall trade deficit includes goods both covered and goods not covered by the agreement.

As we noted in Part I, the KORUS FTA has not been fully implemented. For example, the United States did not cut its tariff on imports of Korean automobiles until earlier this year. Between 2011, the year the KORUS FTA was implemented, and 2015 U.S. imports of automobiles from Korea with engines between 1500-3000 cc increased from $7.5 billion to $11.9 billion (by calendar year). The number of vehicles imported rose from 530,625 in 2011 to 793,333. Under the EPI method that $4.4 billion increase in imports of Korean autos contributes to the estimated job losses caused by the KORUS FTA even though the provisions relating to the agreement had not come into effect. In essence, by looking at the overall deficit figure the KORUS FTA is held responsible for shifts in trade that are market driven rather than related to the agreement.

If we look at the KORUS FTA from the perspective of beneficiary items and non-beneficiary items, a significantly different picture develops than the one presented by EPI. Beneficiary items are the goods that are covered by the agreement, while non-beneficiary items are those that are not covered or have not yet seen a cut in their tariffs. U.S.-Korea Connect, a website run by the Korean Embassy in Washington, DC, breaks out the U.S.-Korea merchandise trade by beneficiary and non-beneficiary items allowing us to utilize the EPI method to see what the impact on jobs would be based on beneficiary items only. In essence, to judge KORUS by what it actually covers.

However, there is one caveat that we should note. As the KORUS FTA is implemented, the composition of beneficiary items changes. For year-to-year comparisons this should be kept in mind. While U.S.-Korea Connect does not provide a baseline number, they do provide the percentage increase in the first year. By using this data we can determine the value of U.S. and Korean exports in the year prior to the KORUS FTA. The chart below shows the value of beneficiary exports and imports under the KORUS FTA, how the balance shifts over the years, and what the jobs picture would look like using the EPI method. As we can see from the data below, given the small surplus the U.S. enjoys among beneficiary items the KORUS FTA has likely created around 3,775 jobs. Similar to the EPI data, there have been revisions to the data on beneficiary items. Korean beneficiary item exports to the U.S. in the first year were eventually revised up by a little less than $1 billion. While a future revision could turn the positive job growth under this method negative, the job numbers would still be in line with the International Trade Commission’s initial estimate that the KORUS FTA would likely have a negligible impact on jobs, certainly not the 100,000 figure from EPI cited by Trump on the on the campaign trail.

KORUS Job Estimates-02

A Caveat on the Numbers

One caveat about our own numbers. The data on jobs supported by FDI are only available on an annual basis, and for simplicity’s sake annual data was used for services trade as well. In contrast, EPI’s data is based on KORUS years, March 15 to March 14 of the following year. This means that the two sets of data are not quite comparable, but they do highlight the broader trend which is that when services and FDI are accounted for any negative impact on jobs in the United States is significantly reduced.

Of course, when one only looks at goods covered by KORUS, the job losses become a small job surplus, an additional caveat one should keep in mind.

What It All Means

The book and movie, Moneyball, made famous the Oakland A’s data driven approach to better understanding baseball. One of the key lessons from that experience is that better and greater amounts of data can provide a more complete picture. If we now know that on base percentage (OBP) is a better metric than batting average for understanding how a hitter is performing, there is no reason that we should not look at more complete data that better reflects the impact of trade agreements on the U.S. economy.  Can we say for certain what the impact of the KORUS FTA on U.S. employment has been? No. As this two part series has demonstrated there are a series of factors to consider.

However, we can say that figures that only looking at the impact of the KORUS FTA in terms of the goods trade deficit or surplus are both incomplete and misleading. Interestingly, EPI would likely agree with this conclusion. When the Washington Post Fact Checker’s critiqued of Public Citizen’s analysis of the KORUS FTA’s impact on jobs, EPI responded to that critique by stating that “By ignoring imports, Kessler completely ignores one of the most important factors in the effects of trade on employment.” By not considering the impact of services, FDI, or looking at figures based on goods covered by the KORUS FTA rather than aggregate trade figures that include goods not covered by the agreement, we ignore “important factors” that help to define the overall impact on jobs.

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

Photo from James Mcdermott’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.