Once touted by US officials as the “gold standard” of trade deals, the South Korea-US free trade pact is facing an uncertain future after the US notified Seoul of its intentions to review the deal, possibly as soon as August.
President Donald Trump has called for the five-year old agreement to be reworked or scrapped, describing it as “unacceptable” and a “job killer”.
Why is it in Washington’s sights?
Known more commonly as Korus, the deal has been caught up in the Trump administration’s push to address bilateral trade deficits, which the White House blames for destroying US jobs.
“Since Korus went into effect, our trade deficit in goods with Korea has doubled from $13.2bn to $27.6bn, while US goods exports have actually gone down,” said Robert Lighthizer, the US trade representative, in a letter on Wednesday to South Korean officials requesting a special meeting to discuss the deal.
“This is quite different from what the previous administration sold to the American people when it urged approval of this agreement. We can and must do better.”
US officials and businesses have also criticised South Korea for not living up to the “spirit” of the deal, pointing to non-tariff barriers and market access problems.
Why is the issue sensitive?
Exports are a fundamental pillar of the South Korean economy, accounting for as much as 50 per cent of gross domestic product, and officials in Seoul are sensitive to any disruption to the trading environment.
South Korea, which under newly elected President Moon Jae-in is still without a trade minister, is expected to try to delay official bilateral meetings.
In a statement seen by the Financial Times, the trade ministry lays out a tough response, saying “both Korea and the US have to agree in order to start such talks” to review the deal, and “one party is not obliged to respond to the other’s request”.
“When . . . the US calls for modifications and amendments to the trade pact, the Korean government . . . will propose the need to investigate, analyse and evaluate at a working level the effect of the Korus FTA and its impact on the imbalance in Korea-US trade.”
In his letter Mr Lighthizer attempts to ease concerns by emphasising “possible amendments and modifications” to the deal, instead of a complete renegotiation with South Korea, a longstanding US ally.
How has the deal performed?
Supporters of the divisive agreement say it spurred closer economic ties between the allies, while eliminating 95 per cent of tariffs on consumer and industrial products over a five-year period.
Critics complain that the deal has not lived up to its promises, highlighting the increase in the US trade deficit in goods with South Korea.
Experts, however, caution that the deficit would have been larger without the pact. They also argue that South Korea’s foreign direct investment into the US has grown, from $4.8bn in 2011 to a record $12.9bn last year.
What could a review achieve?
Revising the pact could be constructive if the process results in the deregulation of South Korea’s markets, particularly its uncompetitive and unproductive services sector.
“US firms can no longer complain about high and economy-wide tariff barriers that impede access to Korea’s market . . . But they can about non-tariff barriers,” said Thomas Byrne, president of the New York-based Korea Society, referring to onerous and protracted approval processes for goods entering South Korea, and product guidelines inconsistent with international standards.
Which sections could be changed?
The motor industry is likely to become the main target of any renegotiations. US carmakers have complained about Seoul’s environmental and certification procedures, which have limited their market share to roughly 15 per cent.
US financial institutions have also complained that South Korea has been reluctant to lift requirements that all data processing must be done onshore, rather than through their global networks. This is despite a clause in the trade deal promising companies would be allowed to transfer data out of the country in “the ordinary course of business”.
Calls for South Korea to further open its legal services market are also likely.
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