Several years ago the US and South Korea signed a Free Trade Agreement that provided a framework for better trade between the partners. During the 2016 US Election campaign, Donald Trump declared it a “horrible deal” and swore to rewrite it if he got the Presidency.
As we all know, he did get the top job and he set about rattling everyones cages – including ripping up the Korean agreement known as KORUS. Except he didn’t – even though he claimed that his Administration had ripped it up and rewritten it. If they did that, he must have employed a whole team of illiterate people who cannot read or write! Trump declared that it was a great deal for both sides and was no longer unfair.
The new KORUS, like the old one, has 24 chapters and the majority of the words are unchanged. If the old one was unfair, then why wouldn’t the new one also be unfair if most of the document is unchanged? The US has a $23Bn trade deficit (excluding services) with South Korea and the “new” agreement is unlikely to affect that if it is so similar. The biggest issue around any free trade agreement with South Korea and any Western country is the significantly reduced cost of manufacturing on the Korean peninsular. The US, Europe or even Australia cannot compete on price.
What is different between the old and new agreements relates to the automotive industry. The first change is that the Big 3 (Ford, GM and Chrysler) will now be allowed to export up to 50,000 cars each – built to US standards and not the local ones. This sounds great, however US cars are not popular in Korea due to a number of reasons. The first is that they are more expensive and secondly, as they are not built to a local standard, buyers prefer locally made. The agreement allows cars to be imported that meet US safety and emissions standards, which are less strict that Korea’s rules. A single visit to the country will show you how many foreign cars there are – a small percentage of the overall market. Having visited many times over the past twenty years, I can tell you that if someone buys a foreign car, it will typically be European.
So because the cars aren’t popular, the US manufacturers were not exporting enough to meet the old agreement, so unless they can start to develop vehicles that the Korean market wants, it is unlikely that this change will improve sales! What the US Administration completely overlooked in their desire to pitch this as a great deal was the fact that the US manufacturers are winding down production of cars in favour of SUVs. The Koreans don’t buy large SUVs.
That then leads us to the second change to the agreement. The US has extended the 25% tariff on light trucks that was due to expire in 2021. It will now expire in 2041. Again, the US Administration failed to understand that Korea produces very few light trucks and do not export that many to the US, so this extension is worthless. In addition, there was no mention in the agreement about fixing the tariffs on imported Korean cars to the US. That means that the US could increase those tariffs on “national security grounds” at any time. That might slow down sales a little, however, US consumers do like the latest models to come from Hyundai and Kia, so they might still buy in preference to a Japanese car.
Korea also agreed to reduce the amount of steel it exports to the US by a third to get the 25% tariff waived. That might help a little bit, however as the tariffs have already increased the price of locally produced steel in the US, it is feasible that South Korea will also benefit from the higher prices.
Although the civil servants have signed the new paperwork, it hasn’t yet been ratified by the South Korean Government and was presented to the parliament a month after the US made their big announcements. It is expected to get ratified before the year end, however it could get delayed as a bargaining chip with other negotiations between North Korea, South Korea, China and the US to improve the relations on the peninsular.
KORUS like the new NAFTA has had more instances of self congratulatory praise than actual changes made to the old agreements!