Mar 13, 2015 - 10:30am

The U.S.-Korea Free Trade Agreement at Three

Former Vice President, Asia and acting head of Asia of the U.S. Chamber of Commerce

The U.S.-Korea Free Trade Agreement (KORUS) entered into force on March 15, 2012. As its third anniversary nears, the agreement is still in an early stage of implementation, but we are seeing important gains in a number of areas. KORUS is significant in several respects:

  • First, KORUS is one of the strongest trade agreements the United States has ever negotiated. It surpassed earlier trade agreements in a number of areas; for example, it carefully addresses a host of non-tariff barriers impacting U.S. manufactured goods, and it breaks new ground with rules to foster the digital economy.
  • Second, of the 20 economies with which the United States has FTAs, Korea is the largest after Canada and Mexico. Korea is the 14th largest economy in the world — a member of the “trillion dollar” club with a GDP over $1 trillion — and the fourth largest in Asia. U.S.-Korea trade exceeds $145 billion annually, making Korea the 6th largest U.S. trading partner.
  • Third, KORUS strives to be a living agreement through mechanisms for dispute settlement as well as regular consultation through committees or subcommittees in 19 different areas, ranging from autos to services to labor. These mechanisms provide a regular means for addressing problems that may arise in implementation, as well as an “early warning” system for issues that could lead to friction.

Korean tariffs on approximately 80% of U.S. consumer and industrial exports were eliminated when KORUS entered into force, and bilateral trade has increased since that time. Trade is likely to expand further as the share of duty-free trade rises to 95% of all goods next year and as U.S. exporters continue to take advantage of new market access opportunities. Consider these snapshots of how trade has unfolded over the past three years:

  • U.S. Manufactured Goods Exports Increase: U.S. exports of manufactured goods have increased since KORUS went into effect, reaching a record high of $37.4 billion in 2014, an increase of 5.6% in the past year. Exports for some key categories grew notably in the 2011-2014 period, including U.S. exports of transportation equipment which rose from $4.2 billion to $5.2 billion (an increase of 23%) and food manufactures, which rose from $3.1 billion to $3.5 billion (an increase of 12%).
  • Sales of U.S.-Made Autos Grow: Korean duties on U.S. exports of automobiles and auto parts were cut in half, from 8% to 4%, when KORUS entered into force, with remaining tariffs to be eliminated next year. Partly as a result, exports to Korea of U.S.-made automobiles rose from $420 million in 2011 to $1.02 billion in 2014, an increase of 143%. However, this increase is from a low base: Sales of U.S.-made vehicles remain low, and there have been multiple challenges posed by various new rules or measures proposed by the Government of Korea pertaining to fuel efficiency, safety and other aspects of vehicle trade.
  • Services Exports Rising: KORUS has proven a boon to U.S. services exports. In the 2011-2014 period, U.S. services exports to Korea rose from $16.7 billion to $20.7 billion, an increase of 24.4%. Among the services industries that are benefitting are: audiovisual; finance; insurance; energy services; transportation, logistics, and express delivery services; information technology services; and telecommunications. One example of the new opportunities for U.S. services exports is the opening of the Korean legal services market. Since KORUS entered into force, more than a dozen U.S. law firms have already opened or are in the process of opening offices in Korea.
  • Agricultural Exports Up Sharply: Korean tariffs on two-thirds of U.S. agricultural products were eliminated when KORUS entered into force, which has boosted U.S. agricultural exports to Korea. U.S. agricultural exports to Korea reached $6.9 billion in 2014, an increase of 31% from the previous year. Under KORUS, products such as almonds and cherries have benefited significantly from tariff elimination, with export growth rates in double-digits.

It is a fact that the U.S. trade deficit with Korea has increased since KORUS entered into force, and it reached $25 billion in 2014. Some anomalous factors have affected U.S. exports to Korea over the past years in unforeseen ways. For instance, a drought in the American Midwest in 2012 led to dramatically lower corn exports (by billions of dollars) in 2013.

The generally restrained growth in U.S. exports to Korea and the more robust increase in Korean exports to the United States are largely due to the difference in economic growth rates and domestic demand between the United States and Korea over the past three years. The U.S. economy has continued to strengthen in the 2011-2014 period, leading to greater consumer spending, which in turn has resulted in higher imports from almost all major trade partners. Growing domestic demand drove total U.S. imports to record high levels in 2014.

At the same time, Korea’s economic growth has been modest by its own standards: Real GDP growth plunged from 6.5% in 2010 to 3.7% in 2011, 2.3% in 2012, and 3.0% in 2013. This resulted in lower overall imports into Korea from many of its major trading partners, including China, Japan, and Southeast Asia. Growth rebounded to 3.7% in 2014 and is forecast to hit 3.9% in 2015 and 4.0% in 2016, so demand — and imports — is likely to pick up.

Implementing any trade agreement presents challenges, especially one as extensive and complex as KORUS. In general, tariff reduction and elimination has been straightforward, while most problems have arisen where new rules are needed or a new approach by Korean regulators is required. The Office of the U.S. Trade Representative has been vigilant in working with both the U.S. private sector and the Korean government to resolve implementation issues as they arise. As the Korean and U.S. economies continue to strengthen and as additional provisions of the agreement come into effect, the U.S. business community expects to see broader benefits from KORUS in the years ahead.

Sources: Statistics are from the U.S. Department of Commerce, Office of the U.S. Trade Representative, and U.S. Department of Agriculture.

About the Author

About the Author

Former Vice President, Asia and acting head of Asia of the U.S. Chamber of Commerce

James Fatheree is the former Vice President, Asia and acting head of Asia at the U.S. Chamber of Commerce.