President Trump NOT bluffing

By Kim Hyeong-woo

Having failed to reach an agreement in the first session, American trade officials met their South Korean counterparts for the second round special session to amend the Korea-U.S. Free Trade Agreement (KORUS FTA) in Washington D.C. This time, on October 4, 2017, U.S. trade representative Robert Lighthizer and Korean Trade Minister Kim Hyun-chong agreed to initiate a process to revise the terms of the KORUS FTA. Korea plans to take the necessary legal steps for the negotiations to amend the trade deal that include economic studies, public hearings, and reports to the National Assembly.

During the first session held in Seoul in August, South Korean trade officials employed hard-bargaining tactics. Kim strongly argued that the U.S. trade deficit with South Korea was not caused by the KORUS FTA, and he proposed a joint study to examine the effects of the agreement instead of renegotiating the terms of the trade deal immediately. Obviously, they decided to step aside from such a hard-line stance. What forced Korean officials to switch to more accommodative ones?

Some people argue that it is mainly because Mr. Trump employed the so-called “madman strategy,” similar to Nixon’s foreign policy, which helped him score his first win on this matter. If that was the case, Trump was actually bluffing when he kept mentioning the possibility of withdrawing from the KORUS FTA.

However, I do not think that is true; I believe President Trump instead actually posed a credible threat to South Korea.

His political gains from pulling the plug on the KORUS FTA are likely to be greater than the losses. Furthermore, being harsh on the trade deal with Korea would look consistent with his America First agenda he has maintained since his presidential campaign, which may please his supporters as well as trade hawks.

If that is true, why doesn’t he withdraw from the North American Free Trade Agreement (NAFTA) instead? Mexico and Canada, the two other member countries of NAFTA, have jointly recorded a $59.2 billion trade surplus in goods with the U.S., corresponding to 11.4% of the U.S. total trade deficit in goods as of August 2017, while Korea is running a mere $15.4 billion surplus with the U.S.: a mere 3% of the total deficit.

Trump’s administration may pursue bilateral trade deals separately with Mexico and Canada if NAFTA talks fail, but they will never completely terminate all trade deals with these partner countries because the U.S. exports to Canada and Mexico are jointly over 35% of its total year-to-date exports this year. Trump cannot afford to lose such a huge market.

What about China? I do not believe Mr. Trump will employ hard-line trade policies against China now, even though the United States is running a $239 billion deficit in goods with China, 46% of the total deficit of the U.S. with the world. That is because China is still holding a key to resolving the nuclear weapons problem that North Korea poses. Furthermore, being hawkish against China may trigger a trade war that will generate a huge economic burden for the U.S. by raising import goods prices and eliminating jobs in America’s export industry to China.

Considering all these, Mr. Trump is likely to make Korea a scapegoat. America’s trade volume with Korea is only a 3.1% of its total trade volume with the world. Therefore, terminating the KORUS FTA wouldn’t be too damaging but Trump’s gains are likely to be substantial. He will be able to consolidate his political support group, and being extremely hawkish on Korea will generate a considerable threat to Canada and Mexico, gaining strategic gains in NAFTA renegotiation talks.

In my opinion, Korea doesn’t have many other options aside from maintaining the KORUS FTA. The Korean government should keep generating objective research materials that show how this five-year old trade agreement has helped generate mutually beneficial welfare enhancement in both countries. It is well-known that America’s trade deficit with Korea is largely driven by Korea's exports of cars, steel, and semiconductors. Korea should make it clear such trade patterns are better explained by productivity differences rather than unfair terms in the trade deal. However, it seems inevitable to ease market access for some industries to some degree, including legal services and the agricultural market, where the U.S. has a comparative advantage.

In his recently published book, Joong-Kyung Choi, former minister of knowledge economy, pointed out that the Korean government should engage in more active diplomatic actions including lobbying activities in Washington D.C. It should be noted that the majority of Republican lawmakers are considered conservatives or libertarians who value free trade greatly. It would be a big help if the Korean government receives supports from the U.S. Congress to retain the KORUS FTA. According to Nate Silver’s FiveThirtyEight, Trump’s approval rating has never been higher than 40% since mid-May, which implies that the Trump administration is not really getting big support from voters. It seems necessary to seek cooperation from American lawmakers rather than the Trump administration.

Dr. Kim Hyeongwoo is an economics professor at Auburn University. He received his Ph.D. from 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.