By Yong Kwon, Soojin Hwang, and Rachel Kirsch 

The ongoing confrontation between the White House and U.S. Congress will likely engross President Donald Trump’s political attention in the months ahead. Given his central role in executing highly delicate negotiations with North Korea and high-stakes face-off over trade with China, the impeachment inquiry may affect the U.S. government’s execution of foreign policy. Two most recent cases of impeachment proceedings against an incumbent president provide insights into what domestic and international observers could expect going forward. 

Reviewing developments during the Nixon and Clinton administrations, domestic political scrutiny did not affect broader foreign policy visions. Simultaneously, the gravity of the foreign policy challenges confronting the respective administrations provided the White House with little cover from the legislature’s hostilities. Notably, already-empowered figures in both administrations enjoyed greater latitude to execute policies while the impeachment proceedings distracted Presidents Richard Nixon and Bill Clinton. However, these figures could not substitute the president’s role in mobilizing intra-governmental coordination. 

While the inquiry against the Trump administration is taking place in a very different political environment than what the Nixon and Clinton administrations faced, these cases provide a glimpse into what may be on the horizon.

On execution of foreign policy: Under Nixon and Clinton, key diplomatic engagements continued unabated during their respective impeachment proceedings. However, Congress placed more stringent oversight on foreign policy issues that had been flashpoints between the legislature and executive before impeachment proceedings, particularly areas that involved the allocation of resources. 

Despite the start of impeachment proceedings against Nixon by the House Judiciary Committee on May 9, 1974, the administration concluded an arms control agreement with the Soviet Union in June 1974. The Threshold Test Ban Treaty was accompanied by other agreements with Moscow that strengthened bilateral economic cooperation. Many conservative and liberal lawmakers expressed wariness towards Nixon’s easing of hostilities with the Soviet Union, but Congress did not (or could not) impede the administration’s engagements. 

However, Congress confronted the Nixon administration on long-standing disagreements. Notably, lawmakers rejected the Nixon administration’s request in 1974 to raise the ceiling on military assistance to South Vietnam. This was an extension of an ongoing dispute between the executive and legislature over U.S. commitment in Southeast Asia. As early as June 1973, when the investigation into Watergate had just started, Congress imposed a ban on any future U.S. military action in the region. 

Similarly, Clinton undertook significant foreign policy measures while facing an adversarial Congress. He led negotiations between Israel Prime Minister Benjamin Netanyahu and Palestinian leader Yasser Arafat in October 1998 despite the House of Representatives authorizing an impeachment inquiry earlier that month. 

Congress too acted more assertively to elevate its long-standing positions while the White House faced mounting public pressure. In September 1998, after Clinton publicly admitted that he had an affair, Congress blocked the administration’s request for increased funding for the International Monetary Fund to assist the containment of the Asian Financial Crisis. U.S. financial support had been a contentious issue that preceded the scandal. In December 1997, Clinton himself had called on Asian economies affected by the crisis to adopt greater macroprudential discipline as a condition for receiving external financial assistance. 

President’s use of foreign policy as a distraction from impeachment: Successive American presidents have been accused of employing foreign policy to distract the public from domestic challenges. Nixon and Clinton’s detractors also floated this theory during their respective impeachment proceedings. In both cases, however, foreign policy crises did not contribute to ameliorating the level of public scrutiny against the White House. 

The Nixon administration faced myriad foreign crises between 1972 and 1974, but Congress refused to be distracted from the ongoing investigation into the Watergate break-in. In fact, Congressman Less Aspin introduced legislation in April 1974 to preempt any efforts by Nixon “[to play] fast and loose with our national security during an impeachment trial.” This conscious bifurcation of foreign and domestic challenges by the legislature may have contributed to the impeachment inquiry continuing unabated through North Vietnam’s 1972 Easter Offensive against South Vietnam, the 1973 Yom Kippur War, and the 1973 oil crisis. 

Similarly, the Clinton administration’s decision to conduct airstrikes against Iraq in December 1998 delayed the impeachment vote from coming to the floor for four days but did not prevent the legislature from taking action indefinitely.  

Shift in foreign policymaking authority: When Nixon and Clinton faced impeachment proceedings, key figures in the administration were elevated to take the lead on foreign policy while the Oval Office focused on mounting a defense. However, these figures could not completely substitute for the president. Government resources could not be efficiently allocated to advance foreign policy aims because empowered personnel could not subordinate other federal agencies and their interests easily without central guidance from the president. 

During the Watergate scandal, Secretary of State Henry Kissinger was given so much authority that Washington Post correspondent Chalmers Roberts described him as a “surrogate president for foreign affairs.” Similarly, Treasury Secretary Robert Rubin was empowered to address the Asian Financial Crisis while Clinton dealt with the political blowback from his affair with Monica Lewinsky. Both figures, however, had a narrow purview and needed the support of other agencies to achieve policy objectives (i.e. aid to Israel in 1973 and pressure on Indonesia to adopt economic reforms in 1998). The president’s role remained essential.

These cases took place in their unique political environments and cannot be directly superimposed on ongoing developments. For example, both Nixon and Clinton enjoyed higher approval ratings than Trump when they initially faced their impeachment inquiries. Moreover, the impeachment proceedings against the two erstwhile presidents were not directly linked to their conduct of foreign policy, insulating this space from political scrutiny. In addition, Secretaries Kissinger and Rubin had been empowered before the crisis and carried the confidence of their peers in the administration. It is unclear if the same could be said about figures in the incumbent administration. Trump’s diminishing approval rating, the focus of the impeachment inquiry on his handling of foreign affairs, and the potential implication of Secretary of State Mike Pompeo in the scandal all point to a potential amplification of the challenges to the administration’s execution of foreign policy.

These caveats make the current crisis against Trump a unique case. Nonetheless, history shows what avenues might both constrain and sustain the administration’s ability to execute foreign policy. 

Yong Kwon is the Director of Communications at the Korea Economic Institute of America. Soojin Hwang and Rachel Kirsch are currently Interns at the Korea Economic Institute. The views expressed here are the authors’ alone.

Photo via the National Archives and Records Administration, public domain/CC0.

By Jenna Gibson

In a new poll from the Asan Institute, South Korean public opinion of North Korea has greatly increased since the beginning of 2018, hitting 4.71 out of 10 in their June poll. According to Asan, this is the first time favorability of North Korea has exceeded 4.0 since they started conducting these polls in 2013. Kim Jong-un similarly saw a spike in favorability among the South Korean respondents, rising to 4.06 from just 0.88 in November 2017.

This result is particularly surprising in comparison to other countries in the region. The United States maintains its position as the most favored nation among Koreans, but North Korea had now surpassed both Japan and China in the eyes of the Korean public.

This increase comes on the back of the inter-Korean and U.S.-North Korea Summits, which recurved positive reviews from Koreans. According to the Asan poll, 71.8 percent of South Koreans evaluated the Trump-Kim meeting as achieving positive results, and 62.6 percent said they believed North Korea will follow through on its agreements to denuclearize.

While the South Korean public remains optimistic about the recent dentente on the Korean peninsula, they will likely be closely watching next steps and their opinion may shift again as the situation continues to unfold.

Image from Wikimedia Commons. Graphic by Jenna Gibson.

By Mark Tokola

First, there was widespread relief that we finally have a new Ambassador to South Korea, retired Admiral Harry B. Harris. It has seemed more than odd not to have had an American Ambassador in Seoul during the eventful past year-and-a-half. Then, commentators began speculating on the meaning of this particular appointment. One Korean friend asked me if it didn’t send a very mixed message to be sending a formerly high-ranking military officer as Ambassador at the same time the Administration is pursuing a diplomatic path with North Korea. Doesn’t that show a lack of faith in the peace process?

My answer to the question was that at a time when we are managing the postponement or scaling back of joint military exercises; when we must be particularly insightful regarding the balance of forces (including weapons of mass destruction and cyberwar capabilities) between North Korea and the alliance; and when the security relationship between the United States and the Republic of Korea may be evolving, military experience probably is exactly what is needed.

That said, Ambassador Harris is not going to Seoul to represent the Pentagon or the uniformed services. As Ambassador, he will be responsible for the full range of diplomatic relations between the United States and South Korea and will work under the direction of the Secretary of State as well as of the President. The individual responsible for military-to-military relations will continue to be the four-star officer who serves as Commander U.S. Forces Korea (USFK), the United National Command (UNC), and the Combined Forces Command (CFC).

Although a Naval Officer from the time he graduated from the Naval Academy in 1978 until he retired as Commander of the United States Pacific Command (PACOM) in May 2018, that does not mean that Ambassador Harris is unfamiliar with the “big picture.” While Commander of the U.S. Pacific Fleet and then as PACOM Commander, Ambassador Harris has spent the past five years closely following all events of significance in Asia, political and economic as well as military. He will bring a rich and up-to-date experience to the job – frankly, far more than most new ambassadors.

It’s worth noting, too, that like many of the most senior U.S. military officers, he has spent part of his career outside of narrowly military affairs: he studied international relations and the ethics of war at Oxford University and at Georgetown University, where he was a Fellow in the School of Foreign Service. We have had a string of high-caliber and effective American Ambassadors in Seoul over the years, that seems to be continuing.

Mark Tokola is the Vice President of the Korea Economic Institute of America. The views expressed here are his own.

Photo via Yokota Air Base.

By Troy Stangarone

In trying to sell Kim Jong-un on giving up his nuclear program, the United States and South Korea have tried to entice North Korea with the promise of a better economic future. As part of this push, the Trump administration has suggested that the U.S. private sector, along with China, South Korea, and Japan, will provide financial assistance to North Korea. However, it has also been made clear that no U.S. tax dollars will be used as an economic inducement for North Korea.

While the refusal to provide aid is in line with President Donald Trump’s desire to ensure that greater costs are born by other states, there is a practical reason why the United States will not provide significant aid to North Korea. The administration is limited in its ability to provide economic assistance.

When Congress legislates sanctions on foreign countries, it generally includes a provision in the legislation that allows an administration to waive the sanctions if it determines that doing so in the national interest. Most of the U.S. sanctions on North Korea contain national interest waivers, but in most cases they do not to apply to the prohibitions on providing aid to the regime in Pyongyang.

In recent years, Congress has inserted specific language into the annual appropriations legislation explicitly forbidding the use of funds for North Korea. These restrictions include credits, loans, or guarantees by the Export-Import Bank. While there are exceptions for humanitarian aid and some other circumstances, it is unlikely that Congress will change course and remove the prohibitions in the near future.

While the administration could request Congress grant it an exception to the prohibitions on aid or to remove them permanently, it would also need to persuade Congress to appropriate the necessary funds. Doing so could be challenging. If the United States intends to provide security assurances to the North Korean regime through a treaty in the U.S. Senate, as has been suggested by Secretary Pompeo, persuading Congress to also waive sanctions on aid will be dependent upon progress on the nuclear issue, and perhaps other issues. Even if the administration can secure an agreement with North Korea on the nuclear issue that would gain the support of two-thirds of the Senate that would be needed for passage of a treaty, Congress may be reluctant to appropriate funds for North Korea if progress is not made on issues that could include North Korea’s chemical and biological weapons programs, its cyber activities, and human rights.

The history of the Agreed Framework suggests that even if Congress agrees to appropriate funds there will be limits. As part of the Agreed Framework, the United States committed to providing 500,000 metric tons of heavy fuel oil a year until a light water reactor was completed. The Clinton administration had promised Congress that the costs would not exceed $30 million a year, and when they did the needed extra funds were not forthcoming. In the case of the Agreed Framework, the funds were designed to serve as a bridge to a new energy resource for North Korea. While it is reasonable to expect that if a deal is struck Congress might appropriate funds for dismantlement of North Korea’s nuclear program, funding that is focused on economic development as opposed to dismantlement is unlikely.

Practically speaking, the Trump administration does not have the authority to provide economic assistance to North Korea and is unlikely to seek it from Congress. It goes against Trump’s broader philosophy and is something Congress would most likely be reluctant to provide. While North Korea will need assistance in developing its economy, there is unlikely to be political support in the United States in the near future for economic aid for North Korea.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo by Pictures of Money on flickr Creative Commons.

After watching the first summit meeting between President Donald Trump and Chairman Kim Jong Un, KEI staff members Troy Stangarone, Kyle Ferrier, and Jenna Gibson share some of the things that stood out to them.

The three analysts participated in a Facebook live video during the start of the summit, sharing their thoughts as the event unfolded in Singapore. You can watch the full discussion here.

Troy Stangarone:

• What made the meeting between Donald Trump and Kim Jong-un stunning wasn’t the symbolic setting of crossing the DMZ that set the tone for the inter-Korean summit, but the fact that a sitting president of the United States was meeting with the leader of North Korea. Now that Kim Jong-un has become the man of the hour he has moved from “rocket man” to “rockstar.”
• At the inter-Korean summit, Kim Jong-un went off script when South Korean President Moon Jae-in asked when he could visit North Korea. With the summit kicking off with a private meeting between Trump and Kim, one wonders if Kim Jong-un surprised Trump with an offer as well.
• Now that the process has started, one of the key things to success will be whether the new process only focuses on North Korea’s nuclear program or whether it tries to build a sustainable relationship by tackling cyber, chemical/biological, and the other issues that could undermine any progress made.

Kyle Ferrier:

• The opening of the summit clearly was more about optics and pleasantries than anything else. That there was not even a reference to any substantive issues highlights how this meeting is foremost about building a rapport between the two leaders.
• Trump’s broad statements about working with Kim Jong-un seem to support his earlier statements that this is going to be a drawn out process with North Korea. This is the best alternative if a concrete agreement is not yet on the table, but the U.S. must use this meeting to at least move the ball forward on the nuclear issue in some way. The Kim family has always had time on their side, so the U.S. can’t wait too long for progress, particularly as diplomatic success is really contingent upon maintaining international economic pressure on Pyongyang. If the diplomatic process goes on for too long it could lead to lax sanctions enforcement due to impatient business interests.

Jenna Gibson:

• Kim Jong Un has truly arrived on the world stage. After successful meetings with both President Moon Jae In and President Xi Jinping in which he was treated to the full summit experience, we just witnessed a leader of North Korea standing in front of alternating American and North Korean flags shaking hands with a U.S. President. No matter what comes out of the rest of this meeting, Kim Jong Un has already gotten a big chunk of what he came for – to be taken seriously as a world leader and the head of a nuclear state.
• I wasn’t necessarily surprised by this because we saw some of this at the Inter-Korean Summits, and we know President Trump’s informal style, but I was still struck by some of the friendly body language between the two, particularly the way Trump kept patting Kim on the arm. This seemed like a very friendly and almost intimate gesture, although I wonder if Trump was purposely trying to send the signal that he’s at ease and not intimidated by Kim.
• The fact that Trump and Kim planned to meet behind closed doors with no one else but interpreters in the room made many analysts uneasy. But at least as far as we could tell, it didn’t cause any major issues – the two emerged 40 or so minutes later still smiling. Considering that President Trump said he would walk away from the table if he didn’t think he could get somewhere with Kim, we’re off to a good start so far. What would be interesting (and we may never know the answer) is whether Trump raised some of the issues that could be embarrassing to Kim if raised in a more open meeting, including abductees and human rights. If he were going to raise those issues, it would have to be in that closed-door meeting.

Troy Stangarone is KEI’s senior director for congressional affairs and trade, Kyle Ferrier is the director of academic affairs and research, and Jenna Gibson is communications director. The views expressed are the authors’ alone.

By Troy Stangarone

In what is being hailed as a significant step by the United States and South Korea, North Korea has announced that it has suspended missile tests and will shut down its nuclear test site. While seemingly an important step towards denuclearization, the move by North Korea only affirms prior statements by the regime.

Shortly after conducting its third intercontinental ballistic missile (ICBM) test and in Kim Jong-un’s New Years Day Address, North Korea had suggested that it had concluded testing for its nuclear program. Since North Korea’s third ICBM test, it is now in the midst of one of the longest pauses in tests under Kim Jong-un. While there are still questions regarding the development of North Korea’s ICBMs, it is this pause that made the upcoming talks between Kim Jong-un and President Trump possible.

However, in light of its earlier announcements, North Korea’s pause in testing was an easy concession to the United States and South Korea, and the announcement of an end to testing is not as significant as it may seem. Any further tests on the part of North Korea would have either been an acknowledgement that it had not actually completed its tests, or would be intended as a clear provocation designed to raise tensions.

In addition, there were already concerns about the geological stability of North Korea’s nuclear test site at Punggye-ri. Since the last nuclear test there have been further signs of instability.

This is not the first time that North Korea has made a largely symbolic gesture in relations to its nuclear program. During the Six Party Talks, North Korea made the dramatic gesture of blowing up the cooling towers at the Yongbyon nuclear power plant to demonstrate its commitment to denuclearization. Those talks ended up failing over North Korea’s refusal to agree to verification procedures. In this case, resuming use of its nuclear test site will be significantly easier than restoring the cooling systems at Yongbyon should North Korea decide to change course.

The announcement also does not does not commit North Korea to denuclearization or to abandon the other significant plan Kim Jong-un laid out in his New Year’s Day Address – to expand North Korea’s stockpile of nuclear weapons and ballistic missiles. In advance of the summits, it would have been more impressive if Kim Jong-un had offered to suspend uranium enrichment or missile production during the upcoming talks, though these steps would also be unverifiable without intrusive inspections.

The announcement does, however, fit into North Korea’s outreach that began at the beginning of 2018 when it announced that it would take place in the PyeongChang Olympics. North Korea may be making a strategic decision eventually to dismantle its nuclear program, but the recent announcement on a suspension of testing and the closing of its nuclear test site should be viewed more as a public relations move than a real step towards denuclearization.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone. Image from Wikimedia Commons.

By Casey Robinson

Under diplomatic and economic pressure, North Korea has ceased weapons tests and has expressed a willingness to denuclearize. In meetings with South Korea, North Korean officials stated that North Korea has no need for nuclear weapons if its security is guaranteed. However, due to lingering distrust and resentment, the denuclearization of North Korea, as well as scaling back U.S. forces in South Korea, is unlikely to occur in the short-term. Consequently, North Korea’s reliability in denuclearizing will continue to be in question. Nonetheless, the North Korean government does have options to boost international confidence and reduce regional tensions in the short-term. One option that North Korea could pursue is address and enhance nuclear safety and security. A nuclear attack is not the only thing that the international community is concerned about. It is also concerned of the international consequences of a nuclear catastrophe or nuclear material landing in the wrong hands due to the North Korean government’s negligence.

Less than a week prior to its first test on October 11, 2006, the North Korean Foreign Ministry stated that it would conduct nuclear tests safely as well as prohibit the first-use and transfer of nuclear weapons. However, despite this statement, there are concerns about North Korea’s handling of its nuclear weapons program. Matt Korda, a researcher in the Department of War Studies at King’s College, expressed his concerns regarding North Korea’s safety culture. He has pointed to a video of Kim Jong-un smoking near a liquid-fueled missile and a report that 200 workers were killed in a tunnel collapse after the sixth nuclear test. Yet, Korda’s major concern is if a nuclear catastrophe occurred, North Korea would likely not ask for international assistance to address the issue. Consequently, nuclear safety in North Korea is a considerable international concern.

In addition, due to increasing concerns about terrorist groups using nuclear weapons or dirty bombs, there has been fear that North Korea would sell nuclear weapons or material to terrorist organizations. The primary argument for this is that the cash-strapped North Korean government has a history of engaging in illicit dealing and selling weapons to terrorist groups. Graham Allision, former dean of the Harvard Kennedy School, has argued for years that North Korea is capable and willing to sell nuclear weapons or materials to terrorist groups. Last year, Allision pointed to North Korea’s dealings with Syria as a precedent that North Korea will go as far as sell to terrorist organizations.

Accordingly, North Korea may benefit greatly if it were to immediately address nuclear safety and security concerns. The United States and South Korea have stated that they will not provide sanctions relief without North Korea first denuclearizing. However, not all governments share the same interests as the United States and South Korea. For example, China, which has historically shown more concern about destabilization and has a reputation of not abiding by sanctions against North Korea, would likely respond well if concerns about a nuclear catastrophe occurring south of its Northwest border decreased. The United States would likely push China to continue to pressure North Korea. However, with greater concerns about the collapse of Pyongyang, China may choose to provide North Korea with sanctions relief as long as its concerns in nuclear safety and security are addressed.

There are many concerns about the reliability of North Korea performing nuclear safety and security functions reliably. North Korea has a history of not abiding by its agreements and is too secretive to allow international scientists to assist it in improving nuclear safety and security functions. However, as Korda points out, nuclear safety (and as I would argue nuclear security) is a sincere interest of North Korea. If a severe nuclear accident were to occur, North Korea’s regime stability would be at risk. In addition, if it was proven that thousands to millions of people perished due to terrorists obtaining North Korean nuclear weapons or materials, the international reaction about North Korea would likely not be pleasant for the Kim regime. Accordingly, permitting foreign scientists in to improve nuclear safety and security functions would be in the best interest of North Korea.

North Korea has recently shown sincerity in denuclearizing, but, as a rational regime, it is unlikely to immediately denuclearize due to security concerns. However, what it can do is commit itself to improving nuclear safety and security functions within the country, which would boost confidence that it is a responsible power. Doing so may help encourage governments to provide it with sanctions relief, but would also decrease incentive to blame it for a terrorist nuclear catastrophe. While the ultimate goal should be denuclearization of the peninsula, these small steps would help enormously in moving North Korea in the right direction.

Casey Robinson is a Ph.D. candidate at Waseda University. His research interests include the DPRK, U.S. foreign policy, and international development. The views expressed here are the author’s alone.

Image from Nicolas Raymond’s photostream on flickr Creative Commons.

By Kyle Ferrier

Analysts have attributed recent market downturns to North Korean provocations, but investors seem to be reacting more negatively to responses from the Trump administration.

Prior to North Korea’s sixth nuclear test on Sunday, Kim Jong-un was cited as a key contributor to recent developments in global markets. The fall in the value of the dollar and the strengthening of the euro and gold this summer have at least been somewhat linked to North Korean provocations. For the dollar and the euro, North Korea is at most exacerbating these trends, not causing them. Since the end of last year, the dollar has been in general decline and the value of the euro has steadily grown. This is primarily driven by looser monetary and fiscal policy in Europe as the Federal Reserve plans to unwind its balance sheet and the White House faces hurdles in its tax reform and infrastructure initiatives. It is harder, however, to argue Pyongyang has played an equally minor role in higher gold prices. Yet, movements in the price of gold and South Korea’s KOSPI stock index this year suggests investors are more concerned with uncertainty stemming from the Trump administration’s approach to North Korea.

Graph of the price of gold, March to September 2017

The conventional wisdom has been that the financial impact of North Korean provocations in South Korea decreases over time. My analysis of North Korea’s nuclear tests, long-range rocket launches, and military provocations along the DMZ through February 2016 (after its second “satellite launch” attempt) found this line of thinking applied to nuclear tests, but could not fully explain the other two categories. It is more accurate to state that the impact of North Korean provocations on markets in Seoul depends on whether a given event is viewed to be outside the context of normal geopolitical developments. That the financial impact of North Korean provocations generally diminished merely illustrated investors had been through similar events and their bottom line was minimally affected. It was not necessarily an indicator of future reactions, particularly as circumstances surrounding each provocation can change dramatically.

KOSPI stock index, March to September 2017

Significant drops in the KOSPI corresponding with North Korean provocations in January and February last year raised concerns that markets were reacting to Pyongyang at levels not seen since the shelling of Yeonpyeong island in 2010, but these can be chalked up to coincidence rather than cause. These concerns were renewed later last year in the aftermath of North Korea’s fifth nuclear test on September 9. Many news outlets linked the 1.25 percent drop in the KOSPI that day to the test, but this was also coincidence and not cause. Of the 1.25 percent drop, only around 0.07 percent occurred after news first broke of the nuclear test at 9:45am. The fall in the KOSPI as well as the won was much more likely linked to Samsung’s Galaxy Note 7 woes as well as a slowdown in global markets. Thus, from 2010 through the end of 2016, North Korean provocations had a negligible impact on markets in Seoul.

The KOSPI’s reaction to the North’s latest nuclear test is the clearest indication that this trend has ended in 2017. On September 4, the first trading day after the test, the KOSPI opened 1.73 percent lower. Though some of these losses were gained back, it was down 1.19 percent by the end of trading. Unlike the previous test last year, the sixth nuclear test is most likely to blame for this drop. The only other instance of a notable drop in the KOSPI caused by a provocation was in response to the July 4 ICBM, though its impact was minimal: The KOSPI closed 0.58 percent lower that day and took five days to recover. The ICBM launch on July 28 saw almost no change in the KOSPI or the value of the won. And, the August 29 ballistic missile that flew over Japan was only met with a 0.23 drop, which was made back the next day.

Timeline of North Korea’s rocket launches and their impact on the South Korean KOSPI stock index.

That markets would react to the earlier ICBM launch and the nuclear test makes a degree of sense, considering that both added a new component of geopolitical risk on the Korean Peninsula. The July 4 missile launch was the first time Pyongyang demonstrated its capability of hitting a U.S. state and the nuclear test also possibly revealed its ability to miniaturize a nuclear weapon.

However, from stronger market responses to the Trump administration’s approach towards Kim Jong-un, it is highly likely that Washington is playing a greater role in the negative market reactions to Pyongyang this year. From April 4 to 11, the height of confusion over the whereabouts of the USS Carl Vinson, the KOSPI fell six straight days, totaling to a 2 percent loss. From August 8 to 11, after Trump’s “fire and fury” comments, it fell four consecutive days, amounting to more than a 3 percent loss. “Fire and fury” was also a retort to the July 28 ICBM launch, which ironically had no discernible financial impact in Seoul.

Table of North Korea’s nuclear tests and their impact on South Korea’s KOSPI stock index.

Both incidents also had a bigger impact on the price of gold than did North Korean provocations.  Between April 3 to 13 the price of gold shot up 2.75 percent. It rose again by 2.5 percent from August 8 to 11. Market responses to the provocations in July were mere blips by comparison. Gold rose a quarter percent on July 4, but was back to its previous price within two days, and the price actually fell after the subsequent ICBM launch. Though the August 29 and September 3 provocations were met with steep price increases – 2 percent and 0.68 percent, respectively – these reactions seem to be heavily influenced by Trump’s “fire and fury” comments, evidenced by the current increase in gold prices starting around the time of his remarks.

While harder to judge from the KOPSI alone, the comparison with gold prices implies that this week’s drop in the KOSPI was a product of market nervousness about how the U.S. might reply to the test, not North Korea. Further, if geopolitical concerns did play a role in the KOSPI in early July, they were likely caused by anxieties about a U.S. response, fueled by the USS Carl Vinson incident and Trump’s “disruptive” foreign policy.

Although these reactions are relatively minor and fleeting in the grand scheme of markets, they provide a window into how investors view geopolitical developments on the Korean Peninsula. They may only reflect temporary sentiments, but present the strongest case there has been in recent years that Washington is perceived as the primary driver of risk on the peninsula, not Pyongyang.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Photo from the Rafael Matsunaga’s photostream on flickr Creative Commons.

By Kyle Ferrier

Last week, the Office of the U.S. Trade Representative (USTR) released its Summary of Objectives for the NAFTA Renegotiation, providing a window into how the administration may pursue updating the U.S.-Korea Free Trade Agreement (KORUS FTA). Because USTR is taking a different approach on the North American Free Trade Agreement (NAFTA) than on KORUS, calling a special Joint Committee meeting under KORUS rules rather than formally triggering the renegotiation process, it is not required to release a similar document outlining negotiation objectives with Korea. Yet, the administration’s regular singling out of both trade deals and characterization of each set of new talks suggests USTR may have similar objectives on both. What then does the summary of objectives for NAFTA portend for KORUS?

The biggest takeaway is that the proposed changes are not as extensive as the administration’s rhetoric on trade would suggest. Although Donald Trump lambasted the Trans-Pacific Partnership (TPP) on the campaign trail and withdrew the U.S. from the deal on his third day in office, most of what USTR is looking to include in an updated NAFTA is either drawn directly from the TPP or generally congruent with the agreement. As such, Seoul should view renewed talks as an opportunity to update KORUS.

Apart from newer amendments on automobiles and beef, KORUS is 10 years old. Some chapters may be in more need of an update than others, particularly e-commerce, though both countries could benefit from revisiting all chapters to reflect more advanced rules. Mexico and Canada essentially went through this process with the U.S. for the TPP negotiations and will have to run the gamut again through the much older NAFTA, turning 23 this year. While Korea may not have been party to the TPP, in many ways KORUS was the foundation for the TPP and it has long been an observer of the deal. Seoul is well-acquainted with TPP rules and the domestic adjustments required to meet their stipulations, which should greatly facilitate discussions on KORUS.

In addition to upgrading the existing chapters, renewed talks could bring new chapters from the TPP to KORUS. The USTR document on NAFTA has separate sections on state-owned and controlled enterprises (SOEs), small- and medium-sized enterprises (SMEs), and good regulatory practices, all of which appeared as individual chapters for the first time in an FTA in the TPP. All three have potential benefits for the Korean economy, especially the SME chapter which seeks to make exporting easier for small companies, a perennial government priority. However, a currency chapter as suggested in the USTR document could be a sticking point.

Although the possible inclusion of currency manipulation provisions may be of concern to Seoul, the Trump administration is not likely to entirely give up on the issue. Addressing Washington’s concerns bilaterally through KORUS may even be a more acceptable venue. Korea is on the U.S. Treasury’s Monitoring List for currency manipulation, meeting two of the three thresholds of a manipulator. Trump’s threats to name China a currency manipulator earlier this year raised concerns that Treasury would alter its criteria, possibly naming Korea a manipulator in the process. Yet in its April report, Treasury largely followed the same methodology as was in previous reports and did not name any manipulators. Nevertheless, there is no guarantee that the next report due out in October would maintain the same criteria, particularly as Trump publicly tied not naming China a manipulator to its help with North Korea, which he seemingly no longer views as a viable policy option.

The USTR objective on currency in the NAFTA document does not offer any specifics, only suggesting that exchange rate manipulation would be avoided “through an appropriate mechanism.” However, if this section were to also follow the precedent set by TPP, USTR will likely ask Seoul to be more transparent in its official currency market interventions, an issue that has been repeatedly raised in Treasury’s international currency reports to Congress. In a 2015 Joint Declaration, TPP countries committed to avoiding currency manipulation as well as publicly reporting their foreign-exchange interventions. As public reporting of foreign-exchange interventions relates to the only Treasury criteria that Korea does not meet (i.e. repeated net purchases of foreign currency more than 2 percent of GDP over the previous 12 months), it may be in Korea’s best interest to be more transparent regardless of this issue arising in trade talks with the United States. Additionally, through KORUS talks, addressing currency manipulation and other contentious issues that might have made Korea hesitant to join the TPP could even help facilitate its accession to the agreement, for which there are convincing arguments.

Although USTR’s objectives for NAFTA largely suggest that the Joint Committee meeting will be used as an opportunity to update KORUS based on free trade principles, Korea should be cautious as well.  Of high concern for Canada and Mexico is USTR’s objective to eliminate the Chapter 19 dispute settlement mechanism for trade remedies as well as eliminate the global safeguard exclusion for NAFTA countries outlined in Article 802. This would make it easier for the U.S. to apply more anti-dumping and countervailing duty measures against both countries and simultaneously more difficult for them to contest these measures. While there is no global safeguard exclusion in KORUS (Article 10.5 says imports “may” be excluded rather than “shall” in Article 802) nor does it go as far as NAFTA on dispute settlement (Article 10.7 does not create binational panels to resolve disputes as does Chapter 19), some are worried these specific objectives are how the Trump administration plans to advance protectionism. Others also expressed concern over the first objective, which states “Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries,” as a possible avenue to implement managed trade rather than free trade.

Though it is too early to definitively gauge how Joint Committee talks will proceed, there is reason enough for Korea to be cautiously optimistic about U.S. negotiating goals. Yet, Seoul would be wise to closely follow the NAFTA renegotiation, giving special attention to areas with the potential to promote protectionism and managed trade.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Image from Michael Vadon’s photostream on flickr Creative Commons.

By Phil Eskeland 

Last March, President Donald Trump directed the Department of Commerce and the Office of the U.S. Trade Representative (USTR) to prepare an Omnibus Report on Significant Trade Deficits within 90 days.  South Korea has been identified as a country that would be included in this report based on 2016 data that shows U.S. goods exports to Korea declined and the trade deficit has grown since the implementation of the Korea-U.S. Free Trade Agreement (KORUS FTA).  While awaiting completion of the report, USTR also issued a letter to Korea asking for a special meeting of the Joint Committee to discuss possible amendments and modifications to the KORUS FTA to address the “significant trade imbalance” between the U.S. and the Republic of Korea.   However, both efforts use outdated statistics with respect to the latest data in the U.S.-Korea trade relationship.

Since President Trump was elected in November, the monthly bilateral merchandise trade imbalance between the U.S. and South Korea has been less that the previous year.  Thus, the six month (December through May) cumulative goods deficit has been cut by more than one-third (or 34 percent) as compared to same six-month time period from the previous year.  One reason for this reduction is that for the months of December, March, April, and May, the U.S. has hit repeated record levels of merchandise exports to Korea – $4.27 billion in December, $4.36 billion in March, $4.43 billion in April, and $4.5 billion in May.  While trade statistics are not available from the U.S. government yet for the month of June, the Korea International Trade Association (KITA) reported that South Korea imported a record $4.8 billion in goods from the United States in June, resulting in yet another month in which the bilateral merchandise trade deficit was significantly less than last year’s level.

This trend is even more pronounced when you include services trade.   Comparing the combined trade imbalance statistic of the 4^th Quarter 2015 and 1^st Quarter 2016 with the 4^th Quarter 2016 and 1^st Quarter 2017[1] (in other words, since Trump’s nomination for president), the trade deficit in both goods and services between the U.S. and the ROK dropped by 37 percent.

This updated information should be incorporated in any analysis of the bilateral trade deficit and as part of any administration strategy to reduce the trade imbalance between the U.S. and South Korea.  It appears that the free market and the KORUS FTA is already working to accomplish the Trump Administration’s goal with respect to lowering the trade deficit between the two countries.

[1] 2^nd Quarter 2017 data on trade in services will not be made available until early September.