A view from inside Autonomous IONIQ vehicle from South Korea's Hyundai at the 2017 Consumer Electronics Show in Las Vegas. Photo: AFP / Frederic J. Brown
A view from inside Autonomous IONIQ vehicle from South Korea's Hyundai at the 2017 Consumer Electronics Show in Las Vegas. Photo: AFP / Frederic J. Brown

In September, US President Donald Trump came close to withdrawing from the South Korea-US free trade agreement, known as KORUS. But then North Korea conducted an ICBM test and officials decided that tearing up the deal might not be a good idea when they wanted Seoul’s help in confronting Pyongyang. A month later the US agreed to renegotiate KORUS with South Korea instead.

National security considerations are one factor that the Trump administration will have to weigh as it seeks to amend the six-year-old KORUS deal, which Trump recently described as a “disaster” while claiming it had cost 200,000 American jobs.

“I don’t know what will happen” with the current renegotiations, Wendy Cutler, who led the US in the original KORUS talks, told the Korea Economic Institute in Washington, D.C. But she expressed cautious optimism that the Trump administration would take a pragmatic approach in the end.

For one thing, the administration has not sought congressional approval in making changes to KORUS – which would be a prerequisite for substantial changes. “Targeted negotiations would help smooth the process,” said Cutler, adding that the scope of the talks would be an important indicator of whether a deal can be reached quickly.

The Office of the US Trade Representative, which is headed by Robert Lighthizer, a trade hardliner, suggested that it was pursuing that approach after a second round of talks ended in Seoul on February 1. In a statement, the Office said the two sides had considered “specific proposals,” including ones on market access and tariffs, such as those affecting cars and auto parts. It also sought to resolve the implementation of promised measures by Seoul to boost the growth of imports of US goods and services in South Korea.

Trump’s recent decision to slap heavy tariffs on imported washing machines and solar cells from South Korea could either help or hurt the negotiations. While Seoul is planning to protest the move to the World Trade Organization, the Trump administration might present those measures as a sop to its political base to make KORUS compromises more palatable.

The US trade deficit of US$18.8 billion in cars and auto parts with South Korea is the biggest bone of contention, with about 80% of South Korea’s trade surplus with the US coming from the auto sector in 2016.

Ironically, the growth of South Korean car production in the US, which Trump should welcome since it leads to local job growth, has contributed to the trade deficit as Hyundai and Kia have increased the import of car parts from their home country. Washington wants the two Korean car companies to use more US-supplied parts.

About half of the Hyundai and Kia cars sold in the US are made there and tougher auto parts content requirements could disrupt plans by the two to increase their factory investments in the US, analysts warn.

US President Donald Trump attends a state dinner hosted by South Korea’s President Moon Jae-in in his honor at the Blue House in Seoul, South Korea, on November 7, 2017. Photo: Reuters / Jonathan Ernst

The US also wants to improve import access for American cars and auto parts in South Korea, with a focus on removing non-tariff barriers, such as easing local safety standard requirements. This is part of a broader plan by Washington to amend provisions regarding tariffs, non-tariff barriers and rules of origin that mandate national content requirements, with the aim of reducing the trade deficit in the auto sector.

One possible compromise by South Korea would be to accept the continuation of a 25% tariff on pickup trucks exports to the US, which was scheduled to be phased out from 2019 under the current deal.

Seoul is hoping to improve its bargaining position by bringing up its own issues. It wants to review the investor state dispute settlement (ISDS) clause in KORUS, which nearly scuttled approval of the trade pact by the South Korean National Assembly in 2011. ISDS provisions allow foreign investors to sue countries for alleged practices through international arbitration bodies, which has been seen in Seoul as an infringement of South Korea’s judicial sovereignty.

Seoul might also explore ways to protect its agricultural industry. Increased US agricultural exports, including beef, pork and grains, to South Korea have been considered a success story for the Americans under KORUS.

“The rest of Asia is watching these negotiations very closely and the prospects for the president’s wish to have bilateral trade talks with other Asian nations will be very poor if they collapse,” said Cutler.

Trump has blamed KORUS for doubling the US goods trade deficit with South Korea since it went into effect in March 2012. US goods exports to South Korea have barely grown and the deficit has risen from US$15.1 billion in 2011 to US$29.6 billion in 2016. But the US’ services trade surplus with South Korea has increased to US$10.7bn over the same period, compared to $6.3bn in 2011.

Lighthizer reportedly urged Trump last year to scrap KORUS if the president failed to implement his campaign pledge to end the North American Free Trade Agreement, which is strongly backed by the US business community, in order to satisfy his political base by showing that he could be tough on trade.

“The rest of Asia is watching these negotiations very closely and the prospects for the president’s wish to have bilateral trade talks with other Asian nations will be very poor if they collapse”

Several recent developments, however, have offered a way out for Trump when it comes to maintaining KORUS. The US goods trade deficit with South Korea narrowed by 18% to US$21.6 billion in the first 11 months of 2017 compared to a year earlier.

The possibility that the Trump administration might adopt a “weak dollar” policy could increase US exports to South Korea. The US trade deficit could also fall if South Korea buys more LNG supplies from the US as it phases out its reliance on nuclear power plants.

In addition, the nuclear crisis with North Korea appears to have persuaded the White House to adopt a softer tone on KORUS out of fear that a tough stance would undermine the security alliance with South Korea.

The recent release of the National Security Strategy, which identifies North Korea as a main security threat to the US, “is binding on Lighthizer,” said Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics. “There is a seamless strategy involved.”

Seoul’s status as a military ally is one reason why the US is unlikely to impose increased tariffs on South Korean steel and aluminum on national security grounds, even while South Korea is included as part of a broader investigation that is mainly aimed at China.

Nonetheless, the Trump administration’s policy to reduce the trade deficit through a revision of KORUS is being criticized by some trade specialists. “This is not going to be fixed by bilateral trade negotiations,” said James Fatheree, vice president for Asia at the US Chamber of Commerce.

He noted that the US trade deficit with South Korea is due to fundamental economic factors. A recovery in the US economy led to increased sales of South Korean cars in the US even before tariffs on them were phased out in 2016, while the market share of South Korean cars in the US has not increased.

In addition, South Korea has had difficulty in matching growing exports to the US by buying more American products since its market is much smaller than the US and its economic growth has been sluggish.