Trump scapegoats Korea

By Kim Hyeongwoo

President Moon Jae-in met with his counterpart Donald Trump in a two-day summit, to discuss many looming issues including those involving North Korea. The summit was successful and productive for South Korea because Moon’s visit officially ended the political vacuum since the impeachment of former President Park Geun-hye and confirmed the active role of the South Korean government in discussions about the denuclearization of the Korean Peninsula.

Even though Moon has won some meaningful support from the U.S. on many political issues, President Trump seemed to be more interested in bilateral trade issues between the two countries.

Since his inauguration, the U.S. has accumulated a trade deficit in goods of about $23.97 billion as of April, which has increased roughly by 7.8% since the first four months of last year. This could be quite disappointing to Trump’s supporters, because during his campaign, he promised that he would take an array of “America First” trade policies.

So, it is not surprising to see Trump’s main priority being bilateral trade deals between South Korea and America. But why Korea? Why not other countries?

If the dollar depreciates, it will help U.S. industries gain competitiveness, and the Trump administration will not have to deal with individual countries. But can Trump rely on a weak dollar? I am not positive.

Though the dollar has slightly depreciated in 2017, the value is still 32.3% higher than that in April 2011, which largely reflects improving economic conditions and upward revisions of the target interest rate in the U.S. Many believe that even more rate hikes are coming up based on the median projection in the Fed’s June dot plot that reaches about 3% by 2019. This implies that there will be 7 more 25-basis point rate hikes. Therefore, it seems reasonable to expect the dollar to remain strong for a while.

If gaining competitiveness via weak dollars is not plausible, the U.S. may have to work on changes in institutional factors such as revising trade deals with individual countries.

As of April 2017, the United States is running a $106.5 billion deficit in goods with China, which corresponds to 44.4% of the total deficit with the world. The next largest surplus countries include Mexico, Japan, and Germany that posted around $20-23 billion surplus (less than 10% of the U.S. total deficit) each with the U.S.

This implies that the Trump administration must initiate aggressive policy actions against China if Mr. Trump is truly serious about improving the trade account imbalance.

As we all remember, Mr. Trump fiercely criticized China for its trade practices during his campaign, but he has done virtually nothing since he was sworn into office.

The Trump administration has reached new deals with China (The May 11 U.S.-China Trade Agreement) that may ease market access for financial and biotech industries, leaving other major issues such as steel and auto parts untouched.

Furthermore, gaining access to these markets in China requires follow-through actions by their regulatory agencies, so many are skeptical of the actual economic impact of this new trade deal because we have observed a big gap between China’s promises and actual implementation. On the other hand, the U.S. recognized President Xi Jinping’s ambitious “One Belt, One Road” international investment initiative, supporting China’s greater regional leadership.

This is far different from a hawkish stance Mr. Trump previously maintained on China. The first reason he switched his stance is that China is holding the key to resolve imminent threat to U.S. national security that North Korea poses.

Secondly, he understands being hawkish against China would generate a huge economic and political burden on him.

Tackling China’s trade abuses aggressively is likely to result in retaliatory trade actions from China, leading to a trade war, which will raise import goods prices and greatly harm U.S. exporting industries. In addition to such economic costs, trade wars will create internal criticism from conservatives and libertarian groups in the Republican Party who value free trade greatly. It is hard to imagine that Mr. Trump will take any risk in doing so especially when he is facing a high probability of being a one term president with an approval rating of less than 40%.

What about Korea? How much can the Trump administration improve the U.S. trade account imbalance by re-negotiating trade deals with Korea?

Even though Korea was the 9th largest trade surplus country, Korea recorded $7.9 billion surplus in goods, which corresponds to a mere 3.3% of the total deficit of the U.S. Considering a rise in Korea’s trade deficit in services with the U.S., the size of Korea’s total trade surplus with the U.S. would be even smaller. Therefore, revising the trade deals will not provide much economic gains to the U.S., although its potential impact on a small open economy like Korea could be substantial.

Then, why does Mr. Trump criticize the Korea-U.S. Free Trade Agreement (KORUS-FTA) and keep requesting a revision of the trade deals? I believe that is because it will provide substantial political gains to him.

Implementing protectionist policy actions against China or Japan will likely generate huge economic costs. In addition, it might generate political costs as well if trade wars take place. On the other hand, such actions against smaller countries like Korea will probably generate less sizable impacts but will provide substantial political gains to Trump. That is, the Trump administration is likely to make Korea a scapegoat to fend off possible political attacks from trade hawks.

The current KORUS-FTA requires Korea to start negotiating the terms if the U.S. makes an official request. That is, it seems inevitable to begin formal procedures for a new FTA between the two countries soon. It is time to get prepared.

Dr. Kim Hyeongwoo is a professor of economics at Auburn University. He received his Ph.D. from The Ohio State University and his B.A. and M.A. from Seoul National University. He has published over 25 SSCI journal articles since 2009 in the areas of macroeconomics, financial economics and economic forecasting. He can be reached at gmmkim@gmail.com.