The US and South Korea struck an important agreement this week. Many are recognizing it as the first success of President Trump’s trade strategy and a turning point in general. It is being offered as an innovative and visionary development. We are less sanguine.
Far from new, we see the US trade thrust as a return to the policies of the Reagan years before the birth of the World Trade Organization and the binding dispute settlement process. These policies consist of threats of tariffs, pursuit of so-called “voluntary” export restrictions, and the use of quotas. Moreover, the US macroeconomic policies, particularly spending, investment, and savings, warn that whatever improvement that can be managed in the US-Korean trade will be lost in the larger forces that will likely lead to wider trade deficits.
US data shows a trade shortfall of almost $23 bln dollar with South Korea last year. Globally, the US trade deficit was almost $570 bln last year. In 2012, when the US and Korea initially struck the trade agreement, the US trade deficit with Korea was about $16.5 bln, and the overall shortfall was about $536 bln. A 20% reduction in the US bilateral deficit with Korea is tantamount to a rounding error in the international balance.
Korea agreed to limit its steel exports to the US to 70% of recent annual averages and in exchange, will not be subject to the tariffs. However, Korean firms are not exempt from the 10% tariff on aluminum. Korea agreed to allow as many as 50k autos per US producer up from 25k now, which they do not even come close to meeting. And those auto imports are exempt from meeting local safety standards, recognizing US standards. Korea has also agreed to eliminating some non-tariff barriers, like environmental testing. Korea also conceded that the 25% tariff on Korea-made pick-up trucks can be extended from 2021 to 2041.
Reports suggest that there is a separate side agreement about currencies. In recent years, the US Treasury has often been critical of South Korea for intervening in the foreign exchange market too much and without transparency. The side agreement is not enforceable with the trade agreement. It is the lack of enforcement that had made some US legislators critical of the Trans-Pacific Partnership agreement that had a similar component, whose enforcement is not clear.
