South Korea and U.S. square off on free trade deal

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With so much attention on trade focused on ongoing NAFTA discussions, as well as recent Trump administration tariffs on washing machines and solar panels, it's easy to overlook trade talks between South Korea and the U.S. on the two countries' 2012 free trade agreement known as KORUS.

These negotiations were not required; the treaty between the two countries is evergreen. But with President Trump calling it a "disaster" last year and threatening to have the U.S. withdraw, a round of talks that most recently concluded two days of discussions earlier this month--the second round--became necessary.

Since Trump made those declarations, there have been several developments unrelated to trade that have possibly softened the U.S. stance. The launch of an ICBM by North Korea highlighted the need for the U.S. to work closely with South Korea. An ongoing trade battle would not help that. Secondly, with NAFTA negotiations bogged down, and the U.S. out of the Trans Pacific Partnership, the Trump administration may be looking to the KORUS talks as a relationship where it can declare it changed the trade relationship between the U.S. and another country, presumably for the better for the U.S.

Michael Allen, a counterproliferation advisor to President George W. Bush, recently wrote in The Wall Street Journal that saving the KORUS treaty is vital to pushing back against North Korea. "It’s hard enough to signal global solidarity against North Korea’s nuclear ambitions with China playing a double game," he wrote. "It would be impossible without South Korea."

"Politically, I think if Trump wants to have a win on trade ahead of the midterms that this would be a pretty decent deal to get off his plate," Scott Seaman, Asia director at political consulting group Europa, said in an interview with FreightWaves. "NAFTA is a beast in terms of having three markets to talk about instead of two, and it's a big agreement in terms of size."

The Koreans came to the table reluctantly, he said. "Korea decided it didn't want to renegotiate, but it was willing to do so to make Trump happy."

What does winning mean?

Seaman added that the definition of a trade "win" is fluid. "The danger is whether a trade win for Trump means he wants to actually throw the deal under the bus and say, this is so bad that I have decided to pull out or negotiate a much longer time," Seaman said "I don't know what a trade win in his mind actually means."

Seaman said he believes that the recent talks at the end of January and into early February were preliminary, "probably spending a lot of time simply trying to define their major tasks." "My impression is that they did not get deep into the nitty gritty yet," he added.

The issue most likely to be discussed is cars. Seaman said if you take apart the trade deficit between South Korea and the U.S.--which narrowed from approximately $27.7 billion in 2016 to $22.8 billion in 2017--about 90% of it is made up of cars. But it's also made up of auto parts, many of them being shipped from South Korea to the U.S. where they are built into the output from the Hyundai plant in Alabama or the Kia plant in Georgia. That content has been a point of contention between the two countries. Additionally, the U.S believes it is being hindered in its sales efforts in the South Korean market. For every U.S. car sold in Korea, data indicates there are more than five sold in South Korea, and that does not count South Korean cars made in the U.S. with significant South Korean content.

Riley Walters, a research associate in the Asian Studies Center of the Heritage Foundation, said he can see room for a tradeoff. For example, South Korea is unhappy with a dispute mechanism in the original treaty, and the U.S. is unhappy with the amount of auto parts coming into the U.S. and then landing inside the cars built by Hyundai & Kia.

South Korean media quoted that country's lead negotiator, Minister for Trade Kim Hyun-chong, as saying the negotiations earlier this month were "very heated."

Solar panels, washing machines and energy

The recent Trump administration to place punitive tariffs on solar panels and washing machine--particularly the latter--is said to have hardened the stance of the Korean negotiators.

One part of the narrowing of the U.S. trade deficit with South Korea is the re-emergence of U.S. beef exports as the biggest source for that country. It was the first time in 14 years that the U.S. wore that crown, according to Reuters, with the U.S. decline first occurring because of mad cow disease. Beef does not appear to be a point of contention between the two sides, though rice is. Walters noted that South Korea still has significant tariffs on rice, which is fairly standard operating procedure for most Asian countries. Still, he said, the U.S. would like those lowered.

Another area of significant change between the two countries is in the area of energy. South Korea imported 276,000 b/d of all petroleum types in November 2017, the latest full month for which data is available. Two years earlier, in November 2015, that figure was 55,000 b/d. Additionally, by November South Korea was importing 21,000 MMcf of LNG from the U.S. A year earlier, the figure was zero.

Both Walters and Seaman said the Trump administration is focused on lowering the trade deficit as an issue in itself, which both said is the wrong approach. "The trade deficit should not be the driving issue of the negotiations," Walters said. "It is a trade deal it should be focused on free and open trade."