April 28, 2017 / 10:32 PM / 7 months ago

Improvements to South Korea-U.S. trade deal may not shrink America's deficit

WASHINGTON (Reuters) - A five-year-old U.S.-South Korean trade deal could be improved to increase access for American vehicles and deter currency manipulation, but changes will not necessarily shrink the U.S. trade deficit with the Asian export powerhouse.

FILE PHOTO: A child holds U.S. and South Korean flags prior to the state arrival of South Korean President Lee Myung-bak at the White House in Washington, October 13, 2011. REUTERS/Kevin Lamarque

The U.S.-Korean Free Trade Agreement, whose anniversary falls next week, had promised to boost U.S. exports by $10 billion a year but in fact delivered an overall decline of $3 billion by the end of 2016, in part due to a slowdown in global trade.

But the record of the accord, once dubbed the “highest standard deal” for America, is now in President Donald Trump’s firing line. He told Reuters on Thursday the deal was “horrible” and he would renegotiate or terminate it.

KORUS, as the deal is known, has been a boon for South Korea and its U.S. goods trade surplus has surged to $28 billion.

“The standards in KORUS are good. The problem is that the South Korean economy is very weak,” said Derek Scissors, resident scholar and Asian trade expert at the American Enterprise Institute. “Even if we renegotiate it, we’re not going to get a surge in exports because they’re just not growing that fast.”

Meanwhile, the U.S. economy is strengthening, supporting consumer demand for imported goods, including cars and electronics from South Korea.

One sector for which the trade deal has not gone horribly is U.S. beef, where exports have risen steadily to overtake Australia as the top foreign supplier to South Korea in February. American beef had been shunned by South Korean consumers after a 2003 incident of “mad cow” disease and was often sold cheaper than Australian beef in Korean hypermarkets like Costco.

Trade experts, including a KORUS negotiator, said potential demands from the Trump administration for renegotiation are likely to include provisions to knock down remaining non-tariff barriers to Korean imports of U.S. autos, an area where KORUS benefits have fallen far short of expectations.

Even though the South Korean car market is among the world’s top 10, the United States only exported about 60,000 vehicles to Korea last year, compared to nearly 1 million vehicles shipped the other way.

“Their market remains essentially closed. There needs to be a plan to open it up,” said Representative Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee.

Barriers, from South Korea’s failure to recognize U.S. vehicle identification number standards to a penalty fee for high-emission vehicles including sport-utility vehicles and “muscle” cars, have raised costs for U.S. vehicles in the market.

Wendy Cutler, a former deputy U.S. Trade Representative who was the chief negotiator on KORUS during the George W. Bush and Barack Obama administrations, said the Trump administration’s recent draft notification letter to Congress for North American Free Trade Agreement talks sets out some guideposts for a KORUS negotiation.

The letter seeks to equalize tax treatment of exports, safeguard “Buy American” public procurement rules, tighten rules of origin to keep more Chinese parts and products from entering the United States tariff-free and include “snap-back” provisions that allow tariffs to be reimposed to guard against a surge of damaging imports.

Cutler also said that while KORUS is the highest-standard trade deal that the United States currently has in force, it could still be upgraded to the now defunct Trans-Pacific Partnership trade deal’s higher standards on environment, labor, intellectual property rights and digital trade.

South Korea was not a party to the TPP, but it “might be able to go further on digital data flows because they’re a very wired society,” said Cutler, now with the Asia Society Policy Institute in Washington.

CURRENCY QUESTION

A provision to deter currency manipulation, enforceable with punitive tariffs, has long been a goal for labor unions and Democrats for U.S. trade deals and also could become part of the talks.

The U.S. Treasury keeps South Korea on a currency manipulation “monitoring list” because of its trade surplus with the United States and its high global current account surplus of 7 percent of gross domestic product. It also criticized Seoul’s lack of transparency in its currency market interventions.

Ford Motor Co (F.N) spokeswoman Christin Baker said the automaker has “consistently supported” currency manipulation rules in U.S. trade agreements.

“We have expressed concern about the implementation of KORUS for some time, including its lack of currency provisions,” Baker said in an emailed statement.

Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, said that KORUS provisions could be crafted for foreign exchange transparency and interventions that could help enforce South Korea’s G20 and International Monetary Fund pledges to avoid competitive currency devaluations.

“If the administration wanted to establish a precedent for new rules against currency manipulation, this might be an appropriate venue to do that,” Schott said.

Reporting by David Lawder; Editing by David Chance and James Dalgleish

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