Korea evades steel tariffs, wins quota from US in quick FTA tweak
Strong-armed trade negotiations appear to have gone smoothly, but upcoming summits remain the top concern in Seoul
The United States and South Korea have agreed to revisions of the Korea US Free Trade Agreement, or KORUS FTA, while also removing Seoul from Washington’s gunsights in regard to steel imports.
At a time when the two allies are playing a high-stakes game on the flashpoint peninsula, the move should calm Korean markets, but other issues – including ongoing cost-sharing negotiations for US troops in the country, and uncertainties hanging over upcoming summits with North Korea and a pending US trade war with China – continue to cast long shadows.
KORUS has a troubled history. It was signed in 2007, and a revised version was agreed on in 2010. The latter only went into effect after both countries’ ratified the deal in 2012. The pact has come under attack from US Democrats and was characterized by US President Donald Trump, who assumed power partly on a platform of better trade deals for US businesses, as “horrible.”
Washington demanded to re-negotiate the deal last April and Seoul reluctantly acquiesced in September. The outcome has proved less painful than many in Seoul anticipated.
The agreements reached on KORUS and steel were detailed by South Korean officials in Seoul on Monday. US automakers gain increased market access, but while South Korea will be forced to slash its steel exports to the US by 30% of the last three years’ average, it gets an indefinite exemption from Washington’s much-feared 25% tariffs on steel.
“The agreement on the US steel-duty exemption and the KORUS FTA removed uneasiness amid rising uncertainties in the global market due to the United States’ trade actions against China,” Trade Minister Kim Hyun-chong said in a briefing in Seoul covered by Yonhap. “It is expected to create a stable business environment for Korean exporters.”
However, the talks leading to the agreement, though swift, were not entirely amicable. “We had heated discussions,” Kim admitted to Reuters.
Under the revised KORUS, the two nations agreed to extend US tariffs on Korean pickup trucks until 2041. Although no Korean automakers actually export pickups to the US, Hyundai had planned to do so from next year, Reuters noted.
US automakers will be able to export 50,000 vehicles per automaker per year to South Korea and they will be subject to US rather than Korean safety regulations, up from 25,000 vehicles previously. US manufacturers have argued that Korean standards are a non-tariff trade barrier.
However, Kim told the press conference that no US automakers actually exceeded the 25,000-vehicle threshold: Ford and General Motors each shipped fewer than 10,000 vehicles to South Korea last year.
US automakers – whose interests Trump has vowed to defend – have had a hard time cracking the Korean market. While European and Japanese carmakers are common sights on South Korean roads, US automakers have consistently lagged.
In addition, the two sides agreed on minor edits to the pact’s investor-state settlement, and to upgrade its dispute settlement process. No concessions were made for US agricultural exporters. The sector is a red line for South Korea, home to a high-visibility farmers’ lobby.
The revised KORUS has still to be ratified by both countries’ legislatures; there is, as yet, no timetable for that.
However, the speed of the negotiations – in contrast to the years-long original negotiations – came as a pleasant surprise to some.
Deal ‘better than expected’
“This turned out better than we expected because the signal received from Washington up to early this year was that the administration was very much intent on getting a deal that would turn the overall trade deficit into a surplus,” said James Kim, a research fellow at Seoul’s Asan Institute. “It is not clear that the current agreement would allow for that.”
In 2017, the US suffered a US$22.8 billion trade deficit with South Korea, according to US census data.
“I cannot say it is the best deal as we were very defensive: We started amendment negotiations because the US wanted to,” said Jae Hyun-jeong, a deputy manager at the Korea International Trade Association. “Of course we made concessions to the United States, but if we look at the total picture, it is second best.”
“All in all, it is not really a big change to the agreement, just some minor adjustments, so this is a positive outcome for South Korea,” Asan’s Kim added.
The results of the negotiations come as rumors of a trade war circulate amid Washington’s announcement of US$60 billion worth of tariffs on Chinese steel exports. If China-US trade relations degrade significantly, Korea would suffer collateral damage.
“That would have some pretty bad implications for South Korea as they are its two major trading partners – they make up about a quarter of South Korean GDP,” said Kim. “Any contraction that results from a trade war would have very negative consequences for South Korea.”
It seems probable that strategic imperatives eased the trade negotiations.
“The strategic and economic alliances cannot be separate, but are not as transparent as economics,” said KITA’s Jae. “I think inside the two governments, the issues may be linked and may affect each other, but we do not know exactly what is going on.”
Meanwhile, the allies are engaged in cost-sharing talks related to the 28,500 US troops deployed in South Korea, and both are preparing for high-stakes summits with North Korea.
The summits, set for April and May and brokered by South Korea are critical following soaring peninsula tensions last year. There are fears in Seoul that if the Kim-Trump summit fails to meet expectations, war clouds could return to Korea.