With the Trans-Pacific Partnership (TPP), a free trade agreement with the United States and 11 other Pacific countries, finished and expected to be debated in Congress later this year, the usual opponents of trade agreements are at it again, using cherry-picked data to discredit trade agreements or trade in general.
Lately, they’ve targeted the U.S.-Korea Free Trade Agreement (“KORUS”). But what’s the real picture?
We are exporting to Korea more American manufactured goods than ever before. Still, our goods trade deficit with Korea also has increased. How can this be?
Economies tend to import more goods when they are growing and less when they are slowing. Korea’s economic growth has been in a slow growth mode relative to its previous high levels since before KORUS went into effect in March 2012. Whereas the Korean economy grew at a pace over 6% in 2010, Korean growth has fallen from 3.7% in 2011 to 2.6% in 2015. Korea’s domestic demand, which affects import levels, has weakened as growth has slowed. While U.S. growth rates have been in the 1.5% - 2.5% range, U.S. domestic demand has picked up, and overall U.S. imports have trended up. The impact? For now, a widening U.S. goods trade deficit.
With KORUS, however, U.S. goods exports also are now much more competitive than before and are thus faring much better – even with Korea’s weaker economy. The data tell the story: Korea’s imports from the world fell by 17% in 2015, but in comparison, its imports of U.S. goods fell by less than 3%.
Even with Korea’s more challenging economic climate, many U.S. manufactured and farm products have still made impressive gains, thanks to KORUS:
- Korea has now eliminated nearly all of its import tariffs on U.S. industrial goods, which used to average nearly 7%. The resulting gains for U.S. manufactured exports to Korea have been strong – over 8% overall. Not every product category has gained, but many have; U.S. auto exports to Korea are up over 200% by value since KORUS has been in force, for example.
- Korea has eliminated the majority of its average 53% tariffs on U.S. agricultural exports – and over time, it will eliminate nearly all of these. As a result, many U.S. farm and ranch exports to Korea have experienced large gains – often double or sometimes even triple-digit gains.
America is running a large and growing trade surplus with Korea in services. Who knew? We did.
Goods are important, but America’s innovators and service providers also support high-paying American jobs. Yet the contribution of KORUS to these exports and jobs is nearly always ignored. Here are the facts:
- U.S. services exports to Korea have increased every year since KORUS opened new services export opportunities for US providers – topping $22 billion in exports in 2015.
- America’s trade surplus with Korea in services in 2015 rose to over $11 billion, and our trade surplus in services has continued to rise each year since KORUS went into effect.
New rules matter. A lot.
KORUS has introduced a wide range of rules that make Korea’s market more open and transparent across many areas. This is critical to give American exporters and service providers the predictability they need to steadily increase their export growth.
Korea has long been a challenging market for many U.S. exporters, and KORUS has not done away with every issue or challenge. However, the KORUS agreement explicitly lays out dispute settlement procedures as well as a consultative process covering 20 sectors or areas that enables U.S. and Korean trade officials to address implementation challenges in these areas.
Significant progress has been made as a result, as a number of thorny implementation problems have been resolved. Some implementation challenges remain, and it is imperative that they be resolved quickly, fully and faithfully in line with the KORUS agreement so that U.S. exporters and service providers benefit fully from it. Moreover, as cited in a recent U.S. Treasury Department report, Korea’s practice of intervening in currency markets to weaken the Korean won is also problematic, as this can quickly undermine the market-opening benefits of an FTA.
Still, to assert that that KORUS is a failure is a position not supported by a balanced assessment of the agreement. Overall, most U.S. exporters report a much improved environment – and are now able to begin to explore and take advantage of new opportunities in Korea. Many of the barriers that kept our exporters out would still be there if it were not for the FTA, and these are rules that work for American exports.
Bottom Line: KORUS Is Opening the Korean Market and Creating New Opportunities for U.S. Exporters and Service Providers
The U.S.-Korea FTA is creating important new opportunities for American exporters and service providers, thus contributing to U.S. job growth.
All trade agreements require continued effort to ensure that they deliver the intended results. Many American manufactured, agricultural, and services exporters are doing more business in Korea than ever before – even with Korea’s slower economic growth and some lingering Korean implementation issues. Korea’s market is becoming more open, predictable, and business-friendly, and it will become even more so as Korea eliminates more tariffs and implements new rules in line with its KORUS commitments over the next several years.
Unless America is proactive in forging and enforcing similar agreements that remove barriers and set rules for trade that reflect American values and interests, we will be locked out of the best terms that our trading partners have to offer. To be sure, others are already filling that void.
So it is important that we all take the full view before concluding KORUS or our other trade agreements are a failure. The full picture shows otherwise.
Data Sources: IMF; WTO; USTR; Department of Commerce/BEA