U.S.-Korea Trade Update

U.S.-Korea Trade Update

Judith Stein: U.S.-Korea Trade Update

The United States and South Korea finally cut a deal. Recall that in 2009 the United States imported $39.2 billion from Korea while it exported $28.6 billion, producing a $10.6 billion deficit. A major part of this deficit was caused by the difference between U.S. auto sales, worth $161 million in Korea, and Korea?s sales of $5.7 billion in the United States. Unsurprisingly, the key public issue surrounding the trade deal was autos.

President Obama obtained two changes. First, there will be a longer lead time for the reduction of auto tariffs on both sides: the United States will start with a 2.5 percent tariff, and Korea will start at 8 percent, and agrees to halve it immediately.

Second, and this gets a little arcane, each of the three U.S. automakers will be able to export 25,000 autos to Korea. You might ask, I thought this was free trade–why the numbers? Remember, tariffs were not the only method that the Koreans used to protect their market. Because they require cars to be inspected by Korean agencies and demand front tow hooks, headlamp standards, and other items totally outside international norms, Koreans have far fewer foreign automobiles than other auto producing nations. Instead of abolishing this nontariff barrier completely, the original Bush-negotiated treaty allowed 6500 vehicles built according to U.S. safety standards, without specific Korean inspections or modifications, to enter Korea. The new agreement allows 25,000. That still adds up to only 75,000 cars. (In the first ten months of this year, Korea exported 449,403 cars to the United States)

The pact also retains ?duty drawback? provisions. South Korea protects its auto parts industry with tariffs. However, if a Korean auto producer imports cheap parts, say from China, and exports that car to the United States, the government will return the duty to the producer. So Korean producers will have additional advantages in the U.S. market. Only 35 percent of Korean cars need to be made from Korean parts to enter duty free. Perhaps that is the reason that the Korean automobile association believes the deal will allow its members to increase market share in the United States. Matt Robinson of Moody?s Analytics agrees that the pact ?represents a significant advantage for Korean businesses.?

Taiwanese Vice Minister of Economic Affairs Francis Liang added that the trade deal will shift U.S. investment, especially in finance and services, from Taiwan to South Korea. This suggests the real reason behind the administration?s actions: President Obama needed a fig leaf for the deal for the auto industry, because of the huge deficit with Korea and the clear barriers to trade. But in the end, the government believes that exporting services and finance, which the pact will facilitate, will end the U.S. trade deficit. This has been a bipartisan faith since the 1980s, and even though the predictions have never come to pass, both sectors have powerful sponsors with access to the president. Larry Summers may be leaving the White House, but his ideas live on.