President Donald Trump is reportedly moving to renegotiate or even cancel the US-Korea Free Trade Agreement. Allow me to explain why this is a uniquely bad idea.
Many of my Bloomberg colleagues have already spoken out to defend the agreement. The Bloomberg View editors point out that since the deal was signed, South Korea has invested more in the US, creating jobs for Americans. David Volodzko notes that US exports of services to Korea have risen as well, creating a $10 billion trade surplus in services. And both rightly argue that South Korea is a key US ally, and that walling off trade from key allies is a bad geopolitical move.
These arguments are certainly powerful and important. But it’s also worthwhile to step back and realize why, in principle, free trade between Korea and the United States is a good idea. That means honestly acknowledging the dangers of free trade, and understanding why Korea doesn’t present those dangers.
How can free trade harm Americans? In the 2000s, the US found out the hard way -- it’s all about painful adjustment. When a huge rush of cheap but highly productive foreign labor comes on the market, it can hurt workers in rich countries. When the US opened up trade with China, that country’s huge labor force, rapid industrialization, and strong productivity spelled career doom for plenty of US manufacturing workers. Instead of finding new jobs in similar roles, most of them took deep and lasting salary cuts, moved to lower-skilled service-sector jobs, or even went on welfare.
But with Korea, there is no danger of similar working-class pain. People might tend to lump Korea and China together because both are in East Asia, both run trade surpluses with the US, and both have economies tilted toward exports and manufacturing. But there are two huge differences that make Korean trade far more of an opportunity than a threat -- Korea is a lot richer than China, and it’s a lot smaller.
Trade between rich countries is different than trade between rich countries and poor ones. Korea and the US have broadly similar specialties -- they both make a lot of cars, electronics, machinery, and other high-value stuff that takes lots of capital investment to produce. In classic Econ 101 trade theory, based on the principle of comparative advantage, the similarity between the US and Korean economies would mean they have little reason to trade. In reality, though, trade between rich countries is common, even when the products are very similar -- Korea buys lots of iPhones, and the US buys lots of Samsung phones.
Economist Paul Krugman came up with a Nobel Prize-winning theory to explain why this happens. His insight represents the most important change in economists’ thinking about trade since the days of David Ricardo. Krugman’s theory is that people like variety in the things they buy -- some people like Apple, some people like Samsung. Krugman used that idea to explain patterns of trade that had puzzled economists for decades.
In terms of gross domestic product per capita at purchasing power parity, China is only about a quarter as rich as the US, while Korea is two-thirds as rich. So US-Korea trade is more likely to follow the Krugman pattern. This can be seen by looking at what the US and Korea export to each other.
Korea runs a trade surplus in categories like machinery, electronics and vehicles. But the US is exporting these things to Korea, even as Korea sells them to the US.
This means that Korea can’t and won’t produce the kind of shock to American workers that China did. When China started manufacturing everything from toys to electronics to clothing to auto parts, the US simply lost these industries. But when trade is increased between the US and Korea, each country will sell more cars and machines and electronics to the other. That means American workers in these industries won’t have to fear being kicked into lower-paying jobs -- Korea represents an opportunity to them, not a threat.
Also, because Korean exports tend to be capital-intensive things like cars and machinery, there’s little danger that US wages will go down as a result of Korean competition. Unlike China, Korea’s entry into the US economic ecosystem doesn’t represent a giant dump of cheap labor. Also, Korea’s small size -- its population is less than one-thirtieth of China’s and one-eighth of the US’ -- means that it couldn’t possibly have the same sort of disruptive effect.
So trade with Korea is nothing to fear. To cut off trade would be like preventing Kentucky from trading with California -- neither would benefit.
It’s possible to overlearn the lessons of the past. China’s entry into the world trading system was a rare event. Free trade with Korea won’t be a repeat of that -- instead, it’s simply an opportunity for the US to grow its economy a little bit while helping out an ally.
By Noah Smith
Noah Smith is a Bloomberg View columnist. --Ed.
(Bloomberg)
