[News Analysis] Trump’s pressure on trade softens, but remains clear

US President Donald Trump maximized his opportunity of making his first state visit amid ongoing security instability to add pressure on South Korea to address what he has called a massive trade deficit, highlighting during a joint press conference that Seoul has agreed to purchase billions of dollars’ worth of American military equipment.

After his summit talks with President Moon Jae-in at Cheong Wa Dae on Tuesday, Trump again stressed the importance of his agenda to reduce US trade deficits, adding that dealing with issues regarding trade was one of the key reasons for his visit to Korea.

President Moon reciprocated Trump’s calls by saying during a joint press conference that they have agreed to “push ahead swiftly discussion related to Korea-US free trade agreement for free, fair and balanced trade benefits.”

Discussion to review ways to amend the 5-year-old deal is expected to hasten following the two leaders’ meeting.

Washington and Seoul commenced discussions following a meeting between the two country’s trade negotiators Kim Hyun-chong and Robert Lighthizer on Oct. 4 in Washington.

Korean authorities are slated to hold a public hearing on the negotiation slated for Friday, upon which economic feasibility evaluations and a report to the National Assembly will follow.

“I would like to thank President Moon for instructing his trade negotiators to work closely with us to quickly pursue a much better deal. A deal, that frankly, has been quite unsuccessful and not very good for the United States,” said Trump, before commenting on Seoul‘s plan to purchase American military equipment.

“We make the greatest military equipment in the world. Whether it’s planes, whether it’s missiles, no matter what it is, we have the greatest military equipment in the world. And South Korea will be ordering billions of dollars of that equipment, which frankly for them makes a lot of sense.” Trump went on to say that the US has already approved a number of the peninsula’s equipment orders, but did not offer details.

The US president also said prior to the news conference that the amount of equipment South Korea would be purchasing from the US would “substantially increase, and therefore (bring) the trade deficit down, which is very important to our people.”

According to an industry insider, Trump avoiding the word “termination” when speaking about the free trade agreement can be seen as a positive sign that the two nations will eventually reach an amicable resolution in its ongoing trade negotiations.

The Korean government as well as a number of US Congress members have publicly stated they are strong supporters of the deal and have urged Trump to avoid any drastic amendments that would jeopardize bilateral relations.

During the two countries’ first special session meeting on the agreement in Seoul in August, Kim Hyun-chong said that two governments were unable to reach consensus regarding changes to the deal.

Early this year, Lighthizer highlighted the US’ $27.6 billion trade deficit last year in goods with Korea as one of the driving forces behind the Trump administration’s push to revise the deal.

However, according to the United States Census Bureau, the US’ trade deficit with Korea has fallen to $17.2 billion as of September this year, a decrease of more than $10 billion compared to last year’s total.

According to Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, although the Trump administration may want to take credit for the trade deficit reduction this year, the deficit lowered naturally.

“The US deficit with Korea is improving this year, dramatically, without any change in the KORUS,” said Schott, during an interview with The Korea Herald in Seoul on Tuesday. Schott was a speaker at the Institute for Global Economics’ seminar on “Trump Administration’s Trade Policy and Modification of the KORUS FTA,” held at the Press Center on Monday.

Korea’s Trade Ministry previously announced that upcoming trade renegotiation talks between Seoul and Washington are expected to focus on the automobile sector. According to the Office of the US Trade Representative, the US deficit in the auto sector was roughly $24 billion last year.

“Sales of US-produced cars have grown dramatically since KORUS entered into force, in particular since the tariff was eliminated ... but part of the problem was that we were starting from such a low base of sales,” said Schott. “So you can have a huge percentage increase in sales of US cars, and it has been very substantial. But if you are just looking at dollars and cents, Korea still runs a large trade surplus in automobiles with the United States.”

However, should Trump make good on his threats to terminate the trade deal if revisions are not made, Korean industry data suggests the US economy would suffer more than Korea. In the event the trade deal is nullified, the tariff rate would be restored to its original level before the agreement came into effective.

At the original tariff rate, both countries’ exports would decline due to losses in price competitiveness.

Data compiled by the Korea Economic Research Institute in September projected that with pre-FTA standards, Korea‘s tariff on US imports would be higher than the US’ import tariffs on Korean products. After adopting the most preferred nation treatment tariff rate, the US tariff rate on Korean imports would stand at 1.6 percent, while the tariff rate on US imports to Korea would be 4 percent higher, according to the institute.

It also remains unclear whether Trump has the power to pull out of the FTA on his own, and according to Schott, abrogating KORUS would mean significant negative impacts, both economically and politically, to Seoul and Washington.

“It is clear that both countries would be worse off if the US-Korea Free Trade Agreement was abrogated,” he said. “While I believe President Trump does have the authority to pull the United States out of the KORUS, if he invokes the withdrawal provisions of the agreement, it is unclear legally whether he has the authority to revoke KORUS trade preferences.”

“I think the administration didn’t do its homework in figuring out what it couldn’t do, and this is a legal complication.”

According to Sung Sohn, a professor at California State University and an IGE keynote speaker on Tuesday, the real causes of the trade deficit between Seoul and Washington is the US’ overconsumption coupled with the sluggish Korean economy.

As for Korea, Sohn added that the country would be wise to eradicate what the international business community refers to as “Korea-unique standards” that differ from international norms. According to the professor, the US and European countries struggle to export heavy vehicles, such as buses, to Korea, as according to Korean regulations, standard US buses are 10 centimeters wider than the country’s permitted vehicle width, while standard European buses are 5 centimeters over the width limit.

“Is it really necessary to have a rule that says buses can’t be 5 or 10 cm wider?” Sohn asked, adding that these types of regulations are unnecessary hindrances that Korea should strive toward limiting.

“It would be really good for President Moon and for the Korean economy to find ways to buy more American goods. I would rather have both imports and exports increase than cancel trade with more restrictions,” he added. “When it comes to KORUS, this is not so much an economic issue, but it’s really a strategic, political issue.” 

By Julie Jackson (juliejackson@heraldcorp.com)