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Sep 2, 2017 | 15:44 GMT

5 mins read

Will the U.S. Free Itself From a South Korean Trade Deal?

South Korean Trade Minister Kim Hyun-chong speaks at the 2007 signing of the U.S.-Korea Free Trade Agreement in Washington, D.C. Thus far, free-trade voices have held sway in the Trump administration. That might be about to change.
(NICHOLAS KAMM/AFP/Getty Images)

The White House is considering beginning the official withdrawal process from the U.S.-Korea Free Trade Agreement (KORUS) next week, several sources have told Inside U.S. Trade. The online publication noted in a Sept. 1 report that U.S. President Donald Trump has not made a final decision on whether to make the move, but the news source also reported that the draft notice has been written and that several members of Congress have been told it will be announced Sept. 5.

The U.S. trade pressure on South Korea comes as Washington is trying to maintain Seoul's cooperation in reining in North Korea. The two negotiations have run on parallel tracks, and South Korea is aware that the United States will pursue its trade agenda regardless of Seoul's cooperation against Pyongyang. However, trade has the potential to drive a wedge between the two allies, particularly as South Korea mulls the pursuit of a softer stance toward the North to avert a military conflict.

Issuing a Threat to Force a Move

While the Trump administration is almost certainly considering a clean break from KORUS, the media leaks and the threat of withdrawal are as much a negotiating tactic as anything else. In July, the United States called for a special meeting of the agreement's joint committee to discuss modifying the deal after arguing that KORUS has unfairly hurt the United States. Since the agreement came into force in March 2012, the U.S. trade deficit with South Korea has increased from $15.1 billion in 2011 to $29.7 billion in 2016. When the joint committee finally met on Aug. 22, talks went nowhere. The United States demanded the two countries renegotiate the deal, but South Korea said it would reject any changes to the agreement that did not come with a recommendation from an objective joint study. This difference in views echoes the disagreement between the two sides during South Korean President Moon Jae In's visit to Washington in June, when Trump said the United States and South Korea were negotiating a new trade agreement but Seoul remained conspicuously silent about such an arrangement.

By threatening to withdraw from the trade deal, the United States is hoping to force South Korea back to the negotiating table. This is the second time that the United States reportedly has been close to withdrawing from an existing trade deal. In April, there were leaks that the United States was about to pull out of the North American Free Trade Agreement (NAFTA), forcing Mexican President Enrique Pena Nieto and Canadian Prime Minister Justin Trudeau to hurriedly phone Washington to object. While the more recent threat may be a negotiating tactic, it is far more realistic than the threat to leave NAFTA.

After all, KORUS is a 5-year-old trade deal between two countries an ocean apart, whereas NAFTA is a 25-year-old trade deal between three countries on a deeply integrated continent. Over the last quarter-century, the United States, Canada and Mexico have developed closer links and sophisticated supply chains where goods crisscross national borders multiple times before finally being sold to end consumers. These deeply interwoven supply chains are difficult to unravel, and the outright breakdown of NAFTA would cause immediate economic pain to a considerable portion of the U.S. electorate — and key Republican Party constituencies. States, communities and a number of powerful industries provide a significant counterweight that constrains Trump's ability to completely rip apart NAFTA.

The same level of supply chain integration with South Korea does not exist. The vast majority of U.S. imports from South Korea are finished products that go to end consumers. The products include $16.4 billion worth of automobiles in 2016 and $7 billion in phones, representing about a third of U.S. imports from South Korea alone. As a result, there would be less of a lobbying push from U.S. industry and fewer immediate consequences to communities and regions dependent on U.S.-South Korean trade.

A Perception of Caution Abandoned

Should the United States actually issue a withdrawal notice — even if its ultimate intention is to make South Korea decide between negotiating or losing the free trade agreement — it would change how the world sees the country's trade negotiation strategy. So far under Trump, the United States has taken a cautious approach toward trade policy. The key professional free trade camp within the White House — led by Treasury Secretary Steven Mnuchin, chief economic adviser Gary Cohn and, to a lesser extent, Secretary of State Rex Tillerson — has been able to prevent Trump from going to the extreme or taking drastic measures. A withdrawal from KORUS would shatter confidence that they would be able to continue to do so.

This newfound doubt would have important implications for Washington's other ongoing trade negotiations. The most critical of these talks concern NAFTA, with a second round of negotiations taking place Sept. 1 to Sept. 5. Trump already has threatened to pull out of the deal once. Last month as the talks began, Trump complained on Twitter that Canada and Mexico were being "very difficult" in negotiations. There has long been speculation that Trump might try to weaken Mexico's and Canada's hands by issuing a formal withdrawal notice — which takes six months to complete — and then negotiating during the countdown as a way to reduce their leverage.

By pulling out of KORUS, Trump would be announcing to the world that he is willing to put his money where his mouth is and sever trade ties with countries. Until now, his policy has focused more on orderly negotiations and higher levels of trade agreement enforcement, but if the president pulls the trigger on KORUS next week, that policy will change.

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