By Phil Eskeland

The U.S. Department of Commerce released its monthly trade data for January, which encompassed 4^th Quarter 2018 statistics on trade in services with 15 individual countries, including South Korea.  Once again, the U.S. maintained its bilateral trade surplus in services with Korea because of yet another record-level of U.S. service exports to South Korea, totaling $24.5 billion for all of 2018.

In addition, the U.S. Census report revealed that the combined goods and services bilateral trade deficit between the U.S. and South Korea has dropped below 2011 levels, the year prior to the implementation of the Korea-U.S. Free Trade Agreement (KORUS FTA).  As noted in an earlier blog, record levels of U.S. merchandise exports to Korea, particularly the dramatic rise in the sale of oil and gas products to Korea, significantly contributed to the decline in the bilateral trade deficit.  But Korea’s continued purchase of U.S. service products, including a steady level of high numbers of travelers from Korea to the United States, contributed to the lower bilateral trade imbalance as well.  Now, there are eight more countries with a higher bilateral goods and services trade deficit with the United States than Korea, including France, Italy, and Taiwan.

As more information about trade flows in 2018 comes in throughout the year, particularly on data related to travel and tourism, the numbers may alter.  However, this achievement in lowering the bilateral trade deficit between the U.S. and Korea was accomplished before any changes to the revised KORUS agreement went into effect last January.  The U.S.-Korea bilateral trade deficit has declined by 71 percent from its height in 2015.  This reveals that the free market and consumer choice were more important factors in the mitigating this issue than any changes to KORUS.  The marketplace effectively took these actions well before President Donald Trump won his party’s nomination for office.

If present trends continue, the U.S.-Korea bilateral trade deficit for 2019 could drop even further to below $3 billion.  Already, U.S. merchandise exports to Korea in January increased 5 percent over January 2018 levels.  However, past behavior is not an indicator of future performance.  There could be other macroeconomic factors, unrelated to any trade agreement, which could reverse these trends, such as a fluctuation in the U.S. dollar-to-Korean won exchange rate.  That is why a fixation on the trade balance is an imperfect indicator of the health of any U.S. economic relationship.

Nonetheless, as Korea presently represents less than 1 percent of the overall U.S. trade deficit with the world, now is not the time to further threaten America’s stalwart ally with higher tariffs on imported motor vehicles and parts.  By all metrics – rise in jobs, U.S. export growth, fostering inward investment, and reducing the trade imbalance – the KORUS FTA is working as intended.  Thus, in light of all that Korea has done to mitigate the irritant in the trade imbalance with the U.S. to placate the Trump Administration, including agreeing to modifications to KORUS, Korea should be exempted from possible higher tariffs in imported autos and parts.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own. 

By Phil Eskeland

Seventh wedding anniversaries are oftentimes overlooked.  It is not as glamorous as a 25^th silver or 50^th golden anniversary.  Gifts associated with a seventh year wedding anniversary in the U.S. are items made either out of copper or wool; a far cry from precious stones linked with other momentous anniversaries.  Nevertheless, on this day, it is still valuable to look back to evaluate the effectiveness of one of the most economically and strategically significant trade deals ever negotiated and implemented by the United States:  the Korea-U.S. Free Trade Agreement (KORUS FTA)

In 2011, the Republican-controlled Congress passed by a wide bipartisan margin the United States-Korea Free Trade Agreement Implementation Act.  The legislation was signed into law by President Barack Obama on October 21, 2011.  The KORUS FTA became operational on March 15, 2012.  While 80 percent of U.S. exports to South Korea of consumer and industrial products immediately became duty free, full implementation of KORUS will occur on March 15, 2022, when almost all remaining tariffs will be eliminated.

Part of the justification for supporting this agreement was an analysis by the independent U.S. International Trade Commission (USITC) that estimated U.S. “merchandise exports to South Korea would likely increase by an estimated $9.7-10.9 billion as a result of tariff and TRQ [tariff-rate quota] provisions” once the KORUS agreement was fully implemented in 10 years.  While the USITC study also concluded that aggregate U.S. employment changes would “likely be negligible” because of the small size of the Korean economy relative to the U.S. economy, this did not prevent the Obama Administration from predicting that KORUS would support an estimated 70,000 U.S. jobs based on a separate calculation, at the time, from the U.S. Department of Commerce that every $1 billion in merchandise exports supports about 6,600 jobs in the United States.

During the early years of KORUS, there were times when it appeared that U.S. exports to Korea were not growing much, if at all, and exasperated a growing bilateral trade imbalance.  As a result, some anti-trade activists criticized the agreement even though the stagnant U.S. export growth was primarily attributable to declining commodity prices and a decision by Seoul to reduce its purchases of coal worldwide to reduce its greenhouse gas emissions.  But as KORUS entered its fifth year of implementation when Korean tariffs on even more U.S. products were lowered further or went to zero, the U.S. became much more competitive in selling goods in Korea.  For example, sales of U.S. beef to Korea (a politically sensitive item in the original KORUS negotiations) have increased by 56 percent in volume and 155 percent in value since 2011 as the Korean tariff rate is gradually being reduced from its pre-KORUS high of 40 percent.

As a result, U.S. exports of merchandise goods to Korea increased by $12.9 billion since 2011 to reach a record $56.3 billion in 2018.  Thus, using the latest exports-to-jobs analysis from the Department of Commerce, the increased level of merchandise exports to Korea supported over 81,000 U.S. jobs.  In other words, at the seven-year mark, the KORUS FTA achieved the benchmark goals estimated by both the USITC and the Obama Administration three years before full implementation.  A tertiary benefit to rising U.S. exports to Korea was also a parallel decline in the bilateral merchandise trade deficit to levels not seen since 2013.  These achievements were all reached before any of the modifications to the KORUS FTA that were negotiated by the Trump Administration last year went into effect in January.

In addition, the composition of U.S. merchandise exports to Korea has changed during the past seven years.  In 2011, the top U.S. export to South Korea was computers and electronic products.  Now, oil and gas produced from the shale revolution in the U.S. comprise the largest share of American exports to Korea, reaching an astounding $8.6 billion.  In fact, Korea is presently the second largest importer of U.S. oil in the world.  This is a byproduct of initially allowing only petroleum exports to countries that the U.S. had negotiated a free trade agreements, but accelerated when Congress formally lifted the ban on crude oil exports to all nations in 2015.

As we reflect on the success of the KORUS FTA on this notable anniversary, it is important to also remember that other factors may influence future economic behavior as we move further away from the initial implementation date.  There are other macroeconomic factors that may alter America’s current market share in Korea, including Korea’s free trade agreements with other countries, along with uncertainties in dealing with the North Korean regime that may have secondary effects on the South Korean economy.  Nonetheless, the initial criticism of the KORUS FTA was premature and not warranted.  The agreement has worked as intended by increasing U.S. export opportunities to Korea, providing additional employment opportunities for American workers, and strengthening the alliance between the U.S. and the Republic of Korea.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.

By Troy Stangarone

If 2017 was the year of “fire and fury,” 2018 saw the United States and North Korea turn from the rhetoric of war to diplomacy as U.S. President Donald Trump met North Korean Chairman Kim Jong-un at the first ever U.S.-North Korea summit in Singapore.

If 2018 was the year the diplomacy on the Korean Peninsula, it was also a year of frustrations as the United States and North Korea have been unable to make progress on agreeing to a path towards the dismantlement of North Korea’s nuclear weapon and missile programs, or in taking steps to build the new relationship promised in Singapore. With U.S.-North Korea relations stalled, North-South relations have been unable to move forward at the pace hoped for despite more extensive agreements on inter-Korean cooperation.

While North Korea dominated the headlines in 2018, the past year began with South Korea’s successful hosting of the Winter Olympics. It saw the United States and South Korea agree to revise the U.S.-Korea FTA (KORUS), but South Korea also become caught in the United States trade war with China. The United States and South Korea also failed to reach an agreement on burden sharing.

On the domestic front, the Moon Jae-in administration implemented a series of new policies to advance an income lead approach to economic growth, but so far has yet to see the results hoped for from its reforms.

As we take our annual look back at the events that helped to shape the Korean peninsula during the past year, it is also an opportunity to review the events we highlighted on The Peninsula in our annual 10 Issues to Watch for on The Korean Peninsula in 2018 blog and the events we didn’t see coming.

Looking back, we largely touched on what would be the key issues on the Korean peninsula in 2018, but we missed on the sudden shift to summit diplomacy on the Korean Peninsula and what in one poll has been identified as the top news story in the United States in 2018 – the summit meeting between Trump and Kim. Here are the issues we identified:

1. Could War Break Out on the Korean Peninsula?

Coming into 2017, tensions between the United States and North Korea had been growing. Pyongyang’s December 2017 inter-continental ballistic missile (ICBM) test demonstrated it had the ability to reach anywhere in the continental United States, even if it had not yet completely mastered ICBMs. Despite the increasing threat of war, we were largely right in our analysis when we said that “war can, and most likely will, be avoided as long as cooler heads in Washington and Pyongyang prevail.” What we largely didn’t foresee is that war would be avoided not just because “cooler heads” would prevail, but that would lead to a year of North Korean summits with South Korea, China, and the United States.

2. The Advancement of North Korea’s Nuclear and Missile Programs

With the movement towards dialogue between the United States and North Korea, our prediction that North Korea would continue to test missiles fell flat. For all of 2018, North Korea refrained from conducting missile tests to either demonstrate new capabilities or to express its displeasure at the progress of talks with the United States. At the same time, there is every indication that our second prediction was correct. Kim Jong-un pledged in his 2018 New Year’s Address that North Korea would continue to expand its supply of missiles and fissile material and has yet to shut down its nuclear facilities at Yongbyon or its missile production facilities.

3. The Impact of Sanctions on North Korea

On the surface, sanctions have worked. Exports to China, North Korea’s primary trading partner have fallen to under $200 million through November. At the same time, despite sanctions causing declines in exports to China and other countries, there are signs that the markets are remarkably stable. In data published by DailyNK, the exchange rate and the price of commodities in markets have been fairly stable. Contrast this with Iran, where the U.S. withdraw has caused the Iranian Rial to drop in value. While the North Korean economy is not in a good position, the effect of sanctions seems to be less than many would have expected.

4. The 2018 Winter Olympics

By all measures the 2018 Winter Olympics in Pyeongchang were a success. South Korea finished tied for sixth for the most medals won, and concerns about attendance were ultimately relieved as the organizers came within their goal of selling 90 percent of the tickets. Most importantly, North Korea took part in the games easing concerns that it could disrupt the festivities and its participation helped to jump start a year of diplomacy.

5. Special Measures Agreement/Burden Sharing

The United States and South Korea have yet to conclude discussions on a new Special Measures Agreement to determine how much South Korea will contribute to the non-personnel costs of U.S. troops in South Korea. While the failure to conclude an agreement has not yet affected the alliance, the current agreement expires at the end of 2018. Indications are that the talks are stalled over an insistence by the Trump administration that South Korea raise its contribution to burden sharing by potentially twice as much as South Korea was previously contributing.

6. U.S.-Korea Trade Policy

The United States and South Korea were able to quickly reach an agreement on modest adjustments to the KORUS FTA. With the National Assembly having approved the changes and the U.S. trade deficit with Korea continuing to decline, the concerns around the KORUS FTA have begun to dissipate.

However, the KORUS FTA was not the only trade issue in the U.S.-Korea economic relationship. As we noted last year, the U.S. used a Section 232 national security investigation to push South Korea into agreeing to a quota on its steel exports to the United States equal to 70 percent of its shipments over the last three years, and also imposed tariffs on Korean washing machines as part of a safeguard case. South Korea may not be out of the woods yet, as a decision will likely come on a Section 232 case on automobiles and automotive parts early next year. South Korea is only major automotive producer to not receive some type of assurance that it will not have tariffs imposed on its exports if automotive imports are found to have national security implications.

7. Will China’s Economic Pressure on South Korea Over THAAD End?

As we foresaw at the beginning of the year, China’s pressure over the decision to deploy THAAD has moderated rather than disappeared. Despite South Korea and China agreeing in October of 2017 to normalize economic relations, Lotte is in the process of closing its Lotte Mart stores in China, and the effects on tourism can still be felt. Based on the latest data from the Korea Tourism Organization, a bit more than 400,000 Chinese tourists traveled to South Korea in November. This is up from just under 300,000 at the same point last year. However, despite the increase in Chinese tourism in November, it is still below its pre-THAAD highs. All told, the South Korean economy has lost more than $13 billion from the decline in Chinese tourism alone.

8. Moon Jae-in’s Promised Economic Reforms

The Moon administration continued to implement its income lead growth policies in 2018 taking steps to shorten the work week and raising the minimum wage for the second year in a row. However, the results have been mixed, especially with slowing job growth in August and September. South Korea also saw estimates for its GDP growth in 2018 and 2019 revised down. Some of this revision is due to external factors, but declines in investment and job growth are also weighing on the economy. The new year will be an important period for determining whether the current challenges are due more to the markets adjusting to the new policies or whether the policies themselves will need to be adjusted.

9. South Korean Local Elections

The ruling Minjoo Party won a resounding victory in the 2018 local elections. The party won 14 of the 17 mayoral and gubernatorial posts up for grabs, as well as 11 of 12 by-elections for the National Assembly. Seoul Mayor Park Won-soon also won a third term as mayor.

10. Hallyu’s Ongoing Rollercoaster Will Continue

The growth of K-pop around the globe was one of the major stories in 2018, even being highlighted by the BBC as BTS became the first Korean group to enter the UK Top 40 and land in the top spot of the iTunes album chart in 60 countries. Despite still facing challenges in China as part of the fallout from THAAD, K-pop saw growth in Japan and in Latin American markets. However, the big success for K-pop came in its breakthrough in the United States. BTS had two albums reach the top of the Billboard 200 and three songs on the Billboard Hot 100. However, the success extended beyond BTS as four other Korean acts landed albums in the top 40 of the Billboard 200 and BLACKPINK saw its video Ddu-Du Ddu-Du gain the fifth most views on YouTube in a 24 hour period among all genres.

The Bonus Issue: Will There Be Constitutional Reform?

While the Moon administration pushed for a package on Constitutional reform to be concluded in time for the local elections, ultimately reform efforts stalled in the National Assembly.

Beyond the events that we expected, here is a look at some of the unexpected events that helped to shape 2018:

1. When Donald Met Jong-un

Prior to 2018 no sitting U.S. president had met with the leader of North Korea. That changed in 2018 as U.S. President Donald Trump altered the normal protocol of only meeting a foreign leader, especially one such as Kim Jong-un, until after a series of deliverables have been agreed to by both sides. The summit in Singapore produced an outline for moving relations forward, but there has been virtually no progress in talks with North Korea, despite the United States canceling military exercises with North Korea. In spite of the lack of progress, Trump has professed his goodwill for Kim saying “And then we fell in love, OK? No, really, he wrote me beautiful letters, and they’re great letters. We fell in love.”

2. Perceptions of Kim Jong-un in South Korea Improved – A Lot

If meeting a sitting U.S. president was an historic moment, it was preceded by Kim Jong-un being the first North Korean leader to cross into South Korea, even if only to the South Korean side of the DMZ. Your author was in Seoul at the time watching Kim cross the demarcation line live on his cell phone in a taxi to the National Assembly. What struck me at the time was lack of coordination on the North Korean side as the delegation walked to the DMZ and the lighthearted nature of Kim Jong-un as he invited South Korean President Moon Jae-in to briefly visit North Korea before their meeting.

Kim’s visit made an impression on South Koreans as well. Prior to the April Summit Kim had an approval rating in South Korea of 10 percent, though that rose to 31 percent after the summit. More impressive, after the summit a new poll found that 78 percent of South Koreans saw Kim as trustworthy. A degree of goodwill remains as 60 percent of South Korea would have welcomed Kim to Seoul had he come in December as expected.

3. Inter-Korean Relations

In addition to the April summit, Kim and Moon held two additional summit meetings – a second summit in the DMZ and Moon’s visit to Pyongyang. These summits resulted in the Panmunjom and Pyongyang Declarations which laid out steps to improve inter-Korean relations. While sanctions related to North Korea’s weapons programs have prevented significant movement on inter-Korea relations, the two Korea’s did take steps to advance relations in 2018. In addition to the summit meetings, the two Koreas held the first family reunion since 2015, took steps to reduce military tensions and implement a new military agreement in the DMZ, and conducted a joint survey and groundbreaking ceremony for a project to reconnect the railways on the Korean Peninsula.

4. North Korea’s Cyber Activities

North Korean has become one of the world’s most active cyber powers and despite the diplomacy with the United States and South Korea, Pyongyang kept up its activities in 2018. According to Group-IB, since the beginning of 2017 approximately two-thirds of the theft of cryptocurrency has been by North Korea, netting the regime $571 million. It also used the Pyeongchang Olympics and summit meetings with Kim Jong-un as potential bait for phishing attacks.

5. The U.S.-China Trade War

In a globalized world where countries are part of supply chains, tariffs are an imprecise tool and South Korea found itself one the countries most exposed to a trade war between the United States and China. More than 40 percent of South Korea’s GDP is accounted for by exports, while China and the United States are South Korea’s top two trading partners, respectively. For most of 2018, South Korea had managed the conflict fairly well by increasing exports to China and resolving the issues around the KORUS FTA. However, in the year’s last quarter South Korea began to see declining demand for its top export to China, semiconductors, while overall sales of automobiles began to decline significantly in China – signs that the effects of the trade war are beginning to set in.

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

Image created by Juni Kim is the Program Manager and Executive Assistant at KEI.

By Phil Eskeland

During Wednesday’s bilateral meeting between President Donald Trump and Japanese Prime Minster Shinzo Abe, both agreed to begin talks on a bilateral free trade agreement.  While Japan was part of the now defunct Trans Pacific Partnership (TPP) trade agreement, this bilateral approach makes sense for the Trump Administration not only because Japan is America’s fourth largest trading partner and could provide a new lucrative markets for U.S. exports, particularly in the agricultural sector, but the country is also fourth largest contributor to the U.S. trade deficit.  In 2017, the U.S. goods and services trade deficit with Japan reached $56.6 billion.  For the first six months of this year, the bilateral trade imbalance grew by 8.3 percent to reach $30.1 billion.

However, as part of the announcement, the U.S. and Japan also agreed to “refrain from taking measures against the spirit of this joint statement during the process of these consultations.”  This is widely interpreted to mean that the U.S. would refrain from imposing higher tariffs on imported Japanese autos and parts while the trade negotiations are on-going.

This joint statement joins a similar announcement that the U.S. reached with the European Union (EU) that both sides “will hold off further tariffs.”  A related understanding has also been reportedly reached with Mexico in an undisclosed side agreement as part of the new U.S.-Mexico trade deal to allow higher tariffs, but only if Mexico exports more than $90 billion in autos to the U.S., which translates into approximately 2.4 million units.  As a point of reference, Mexico only exported about 1.8 million cars and trucks to the U.S. in 2017, so this possible restriction may be immaterial.

Because there are only five major sources of automobile production that comprise almost all imports into the United States (EU, Mexico, Japan, Korea, and Canada), there is concern that with agreements reached with the EU, Mexico, and now Japan, South Korea and Canada still remain possible targets of higher U.S. tariffs on imported motor vehicles and parts for dubious national security reasons.  While the U.S. is still trying to entice Canada to join the revised North American Free Trade Agreement (NAFTA) with threats to impose higher tariffs on autos made in that country, the U.S. and South Korea recently signed revisions to the Korea-U.S. Free Trade Agreement  (KORUS FTA).  These new changes included a series of modifications to the auto provisions that the Office of the U.S. Trade Representative said will “strengthen our national security relationship.”  However, there are no public reports either during or after the signing ceremony that a similar assurance was given to South Korea that the U.S. would exempt Korea from higher tariffs in imported autos and parts even though Korea has consented to a series of U.S. demands on trade policy, from revisions to KORUS to import quotas on Korean-made steel.  Particularly at this challenging time in dealing with North Korea and recognizing the national security value of the revisions to KORUS, the U.S. should extend the same courtesy as it provided to other friends and allies of the U.S. – the EU, Mexico, and Japan – to publicly commit to refrain from imposing higher tariffs on all imported autos and parts from the Republic of Korea.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own. 

Photo from Bernard Spagg. NZ’s photostream on flickr creative Commons.

By Troy Stangarone

The United States and Mexico recently announced that they have reached a preliminary agreement on updating the North American Free Trade Agreement (NAFTA). While Canada still needs to conclude talks on the revised NAFTA, the initial agreement announced includes proposed changes to automobile trade in North America that have implications for Hyundai and Kia.

In 2016, Kia opened a new production facility in Mexico as part of its efforts to break into the Mexican market and provide extra production for the broader North American market. The plant currently produces the Kia Forte and Rio models, as well as the Hyundai Accent. Last year, the plant produced 250,000 vehicles, though it has the capacity to expand to 400,000 units, and half of the production was exported to the United States.

In 2017, Kia sold 117,596 Kia Fortes in the United States and 16,760 Rios. While exact export figures from the plant in Mexico are unavailable, it is likely that a significant majority of the Kia Fortes sold in the United States and possibly all of the Rios were produced at Kia’s plant in Mexico. The Hyundai Accent, which the plant recently began producing, had sales of 58,955 in the United States last year.

Producing in Mexico is appealing to South Korean automotive producers for its lower labor costs, which on average are a fifth of those in South Korea and only a tenth of that in the United States. For example, as a new contract signed in January for workers at Hyundai in South Korea calls for workers to make an average of 50 million won ($45,138). In contrast, workers in Mexico at even luxury vehicle producers such as BMW often have a top wage of as little as $2.53 per hour.

Under the revised NAFTA, to be eligible for export to the United States, 75 percent of the vehicle content would need to be produced in North American (U.S. and Mexico), up from 62.5 percent, and 40-45 percent of that content will need to be produced by workers making at least $16 per hour. Additionally, there are reports that the United States and Mexico reached a side agreement to exempt the first 2.4 million vehicles produced in Mexico from any national security tariffs the United States might impose from the ongoing Section 232 investigation on automobiles and automotive parts.

In light of the proposed revisions to NAFTA, the simplest course of action for the production of Korean automobiles in Mexico may be to export vehicles to United States while not utilizing NAFTA. At the moment, the vehicles produced at the Kia’s plant in Mexico do not contain enough North American content to qualify for NAFTA. According to data from the National Highway Traffic Safety Administration, the Rio and the Forte contain 49 percent North American content, while the Hyundai Accent contains 50 percent North American content.

Choosing to export to the United States without using NAFTA would allow South Korean producers to not have to meet the new, higher North American content requirements. At the same time, it would allow them to not have to deal with the new wage floor established by the NAFTA revisions.

The trickier issue may be the Section 232 case. As a significant exporter of automobiles to the United States from South Korea, the Section 232 investigation has been of concern. However, recent comments by South Korean Trade Minister Kim Hyun-chong suggest that the Seoul and Washington may have reached an understanding on this issue in light of the fact the revised KORUS FTA has already modified the provisions of this pact.

The side letter with Mexico, though, raises two possibilities. The first being that the United States does intend to impose a 25 percent tariffs on imports of automobiles and automotive parts. The second, is that the United States reached an agreement on this issue with Mexico to leverage other trading partners into striking deals as well by signaling that it may follow through with the new tariffs. If it is the first, it would impact Korean exports from Mexico.

Initial reports indicate that the to be eligible for the Section 232 exemption in the side letter with Mexico, vehicles would have to meet the new NAFTA content standards – 75 percent North American content and 40-45 percent of the content from wages above $16 an hour. If the U.S. did impose a 25 percent tariff on automobiles and automotive parts, Korean producers would need to raise the current North American content level in their production to avoid the new tariff.

However, the U.S. Trade Representative’s fact sheet on the new wage standard is unclear on where the content must come from. While the text of the agreement should clarify this issue, if it is merely that 40-45 percent of the North American, not Mexican, content must be from wages over $16 an hour, it may be more cost effective to use parts from the United States to meet the new standard and maintain the current wage structure in Mexico.

Once the revised text is released in the months ahead, there will be more clarity on how the new NAFTA will work. But at this early stage, it is clear that the changes to NAFTA will also affect South Korea’s automotive exports to the United States from Mexico.

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 from GabboT’s photostream on flickr Creative Commons.

By Phil Eskeland

Earlier this morning, the Foreign Trade Division of the U.S. Census Bureau revealed the latest set of monthly trade statistics.  The August release of June trade figures provides an opportunity for a mid-year review on trends in U.S. goods trade with all nations of the world, including South Korea.  Next month, Census will released the 2^nd Quarter data with respect to services trade, so that will be another opportunity to obtain a more complete mid-year view of the overall trade relationship in both goods and services with various countries.  For example, for the first three months of this year, the U.S. almost had a balanced goods and services trade relationship with South Korea, with only a modest $83 million cumulative deficit, in contrast to the $9.1 billion 1^st Quarter trade deficit the U.S. ran with Italy.

While America’s overall merchandise trade deficit with the world went up by 6.7 percent for the first six months of this year, the trend with South Korea continued its downward trajectory, declining 23 percent.  There one major reason for this trend: in 2018, U.S. exports to Korea have greatly expanded, averaging over $4.5 billion each month (a record was set in March at $5.1 billion).  This may be a “Trump effect,” but it is mostly due to more favorable domestic market conditions, particularly as Korea continues to buy more energy resources from the United States.

This news is on top of recent release of updated information from the Bureau of Economic Analysis from the Commerce Department documenting the growing amount of foreign direct investment (FDI) by Korean firms into the United States, reaching a record high of $50.6 billion in 2017, up over 23 percent since 2016 or 150 percent since 2011, the year before the Korea-U.S. Free Trade Agreement (KORUS FTA) went into effect.  Over 51,000 American workers at U.S. subsidiaries of wholly-owned Korean companies earned an average compensation package of over $91,000 per year (2015).  In contrast, overall FDI into the U.S. declined by 32 percent in 2017.

Factors such as a declining bilateral U.S.-ROK merchandise trade deficit and increased FDI from Korea into the U.S. must be taken into consideration as the Trump Administration contemplates further action on the trade front.  South Korea has been a constructive and valuable partner of the U.S., not just in the military alliance and in diplomatically dealing with North Korea, but also on trade.  South Korea could also take an indirect hit to its economy if higher U.S. tariffs are contemplated against more consumer-oriented products made in China, particularly if the duties are aimed at goods assembled in China containing semiconductor components made in Korea.  There is no need to open up new areas of friction in the U.S.-Korea trade relationship, such as levying a 25 percent tariff on U.S. imports of Korean-made autos and parts, when other countries posed larger challenges to U.S. economic and security interests.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own. 

Photo from Wilson Hui’s photostream on flickr Creative Commons.

By Kyle Ferrier and Linnea Logie

While South Koreans celebrated their team’s upset victory over Germany in the World Cup earlier this week, no country was happier about the win than Mexico. The South Korean “Reds” late game heroics against Germany advanced Mexico to the next round of the tournament despite Mexico’s simultaneous 3-0 loss to Sweden, causing pro-Korea euphoria to sweep across the country. Videos of people celebrating outside of the South Korean embassy in Mexico City, hoisting Koreans on their shoulders to a chorus of cheers, and pictures of stores offering heavy discounts to Koreans flooded the internet. Although it may seem like an unusual pairing at first glance, Koreans and Mexicans actually have a long history of working together. Below are some key areas of cooperation beyond sports.

That’s the Korean consul general to Mexico, Byoung-Jin Han, celebrating with grateful Mexican fans outside the Korea embassy here. One fan said he took a shot of tequila with them earlier. pic.twitter.com/NGWEmRADUW

— James Wagner (@ByJamesWagner) June 27, 2018

Official Relations

Diplomatic history

Mexico and South Korea formally established diplomatic relations in January 1962 driven by South Korean leader Park Chung-hee’s efforts to open new markets for exports. South Korea opened an embassy and appointed an ambassador shortly thereafter, while Mexico waited until 1978 and 1987 to open an embassy in and post a resident ambassador to Seoul, respectively. The Korean Embassy in Mexico City has played a key role in spreading Korean culture, particularly from when the first bilateral cultural agreement was signed in 1966 through the late 1990s when the two countries first started a dialogue on educational and cultural projects, which continues today and has produced numerous programs such as festivals and museum exchanges. In international relations, both countries are middle powers and belong to the informal middle power partnership known as MITKA (an acronym for the members of Mexico, Indonesia, Turkey, Korea, and Australia).

North Korea

Mexico and North Korea first established diplomatic relations in 1980. Mexico City is one of only 48 cities in the world to host a North Korean embassy, but Mexico does not have an embassy in Pyongyang. In protest of North Korea’s sixth nuclear test in September 2017, Mexico expelled the North Korean ambassador Kim Hyong Gil. In 2017, reported North Korean exports to Mexico were valued at $6,102,754.

FTA negotiations

South Korea and Mexico officially launched negotiations for a free trade agreement in 2007, but talks stalled because of Mexican concerns that a deal could have widened its trade deficit with Seoul. However, amid growing protectionism, both countries have announced a renewed interest in accelerating negotiations. A Mexican government official has even recently stated, “We have selected strategic partners worldwide, and in Asia, our major strategic [economic] partner is Korea.”

¡Te amamos Corea! Nuestros vuelos de México a Corea tienen 20% de descuento. #VolamosConTodo #GraciasCorea https://t.co/vCVAlmJ3Hl pic.twitter.com/i8WJWJV8wE

— Aeroméxico (@Aeromexico) June 27, 2018

People to People Links

Tourism

Mexico is a popular destination for South Korean honeymooners. It also may be gaining popularity among retirees as an affordable travel spot. Last year, 75, 415 South Koreans visited Mexico, up from 63,661 in 2016. From January through April 2018 this year, 30,230 South Koreans travelled to Mexico, which is a third more visits than during the same period in 2017. While fewer Mexicans travel to South Korea, it is becoming a more popular destination. From January through May this year, 9,509 Mexicans have visited South Korea, a nearly 50 percent increase from the same period last year.

Hallyu

The Korean culture wave is swelling in Mexico. Korean culture has increasingly entered homes throughout Latin America in recent years by way of K-pop and Korean dramas, giving rise to fan clubs for South Korean actors and music groups. Mexico City was one of only two cities in 2014 to host Music Bank¸ a Korean music show featuring live performances of multiple K-pop groups outside of South Korea. South Korean music groups are increasingly releasing songs in Spanish, including the girl group Crayon Pop which collaborated with the Mexican boy band BD9 for the song “Get Dumb.” When Mexicans wanted to show their appreciation to South Koreans after their World Cup victory they played K-pop on local radio stations and bought songs from groups like BTS, whose song “Fake Love” climbed 31 spots on the Mexican iTunes Charts on the day of the game.

Trade and Investment

Mexico is South Korea’s largest Latin American trading partner, while South Korea is Mexico’s third largest export destination in Asia, after China and Japan. South Korea exported nearly $11 billion in goods to Mexico last year, a 12.5 percent increase from 2016, and Mexico exported about $4.4 billion to South Korea, a 20 percent increase from 2016. South Korean has invested $5.6 billion in Mexico, while Mexican investment in South Korea is around $60 million. Over 1,800 Korean companies operate there. South Korea’s main exports are liquid-crystal display devices, optical devices and instruments, electronic parts, auto parts, vehicles, and electrical machines, appliances and equipment. Mexico’s main exports to Korea include crude oils, lead minerals and concentrates, zinc ores, silver ores, copper ores, and electronic devices.

Btw Koreans love Mexico’s music. Fun fact: “Sabor a mi” (performed here) is my go to karaoke song. pic.twitter.com/3BD4d0CuIX

— Gene Park 🇲🇽🇰🇷 (@GenePark) June 27, 2018

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. Linnea Logie is currently an Intern at the Korea Economic Institute of America and is also an incoming graduate student with the Security Studies Program at Georgetown University. The views expressed here are the authors’ alone.  

Image by KEI’s Jenna Gibson.

By Kevin M. Rosenbaum

Enhanced bilateral trade and investment under the Korea-U.S. Free Trade Agreement (KORUS) has positively impacted the U.S. copyright industries—producers of literary works, music, movies and TV programming, and video games and software—in several ways. As an initial matter, it is important to understand the contribution of these vital industries to the U.S. economy.  The core copyright industries combined, according to a December 2016 study, generate over $1.2 trillion of economic output, accounting for nearly 7% of the entire U.S. economy; and employ over 5.5 million workers – in high paying jobs – accounting for almost 4% of the entire U.S. workforce.  Their foreign sales and exports grew from $147 billion in 2012 to $177 billion in 2015, reflecting extraordinary growth in the timeframe since KORUS entered into force and significantly exceeding foreign sales of other major U.S. industries.

KORUS was a significant step forward in many respects for the critical industry sectors that depend on copyright protection. On the issues of copyright law reform and copyright enforcement, KORUS is one of the strongest and most ambitious trade agreements ever negotiated. It also includes important commitments that further opened the Korean market to the U.S. copyright industries. Current and future trade negotiations, including the ongoing NAFTA negotiations, would do well to build on key aspects of the KORUS agreement’s strong rules for copyright protection and enforcement, with few exceptions.

The impact of KORUS on the copyright industries has been remarkable in several ways. Back in 1985, U.S. works and products received virtually no copyright protection in Korea.  Piracy was rampant.  The International Intellectual Property Alliance (IIPA)[1] described the situation to the U.S. government as follows: “Pirates have all but taken over the sale of records and tapes, videocassettes, books, and computer software.” As late as 2007, before KORUS was signed, a study conducted by the Korean Film Council (COFIC) estimated that the Korean film industry suffered losses of $1 billion as a result of online piracy and, between 2002 and 2007, piracy reduced the overall home entertainment market in Korea by half.

Today, Korea boasts a strong copyright law, which in several respects exceeds U.S. law in its robust protections for creative works.  While this dramatic improvement in Korea’s legal standards, and subsequent upgrades to Korean enforcement efforts against piracy, have been a continual process, KORUS was undoubtedly a critical catalyst.  Almost contemporaneously with KORUS taking effect, Korea responded by adopting major upgrades of its copyright laws and enforcement regime.

The dramatic change in Korea is reflected not simply in laws and regulations, but in market realities. Thirty years ago, revenue for the U.S. copyright industries in Korea approached zero.  In 1993, IIPA estimated trade losses to U.S. industry due to copyright piracy in Korea at $423 million.  Today, South Korea is a robust and growing market for music sound recordings, movies, TV programming, videogames and other entertainment software, and books and other publications, benefiting both American and Korean creators, innovators, and workers.  The KORUS agreement has played a significant role in Korea’s transformation into a vibrant marketplace for U.S. creative works, and a cultural powerhouse in the Asia-Pacific region.  For the film industry, it is widely recognized that KORUS’s market opening steps have contributed to the steady growth of the Korean film industry with new box office records year on-year and Korean films taking 54 percent of the Korean market in 2016.  Korea is the sixth largest market in the world for video games with an estimated 25 million Korean gamers and revenues of $4.2 billion in 2017.

The Korean music market illustrates KORUS’s profound impact.  In 2012, the music market was shrinking, generating revenues of less than $200 million, a decrease of 4 percent from the year before.  But since 2012, the year KORUS entered into force, the music market has experienced double digit increases, and in 2016 Korea’s music market stood as the eighth largest in the world, with revenues of more than $330 million, an increase of over 23 percent from 2015.

Of course, notwithstanding the significant improvements to Korea’s laws and the growth of the market, important challenges remain.  For example, there has been an attempt in Korea to extend the scope of mandatory collective management of rights and statutory license fees for certain types of digital music services.  This would hurt rights holders and undermine KORUS obligations that have resulted in improved copyright protections.  In addition, the creative industries continue to raise concerns regarding efforts around the world to diminish strong copyright protection and enforcement by, for example, introducing what amount to loopholes to protection and safe harbor provisions that do not adequately incentivize Internet platforms to cooperate with rights holders on finding ways to address infringing content on their networks, thereby allowing Internet platforms to profit unfairly at the expense of rights holders.  U.S. trade negotiators should ensure that KORUS is used as a model to promote strong copyright protection and is not used to undermine such protection.

It is important that the positive changes that KORUS has helped to foster are not reversed, but instead continued and built upon.  The creative industries in both the United States and Korea – and the many high paying jobs these industries support and the economic and cultural benefits that these industries provide – depend on it.

Kevin M. Rosenbaum is Of Counsel at Mitchell Silberberg & Knupp LLP, and Counsel to the International Intellectual Property Alliance. The views expressed here are the author’s alone.

Photo from Bigotes de Gato | Fotografía’s photostream on flickr Creative Commons.

[1] IIPA is a private sector coalition, formed in 1984, of trade associations representing U.S. copyright-based industries working to improve international protection and enforcement of copyrighted materials and to open foreign markets closed by piracy and other market access barriers. Members of the IIPA include Association of American Publishers (www.publishers.org), Entertainment Software Association (www.theesa.com), Independent Film & Television Alliance (www.ifta-online.org), Motion Picture Association of America (www.mpaa.org), and Recording Industry Association of America (www.riaa.com). IIPA’s five member associations represent over 3,200 U.S. companies producing and distributing materials protected by copyright laws throughout the world. These include entertainment software including interactive video games for consoles, handheld devices, personal computers and the Internet, and educational software; motion pictures, television programming, DVDs and home video and digital representations of audiovisual works; music, records, CDs, and audiocassettes; and fiction and non-fiction books, education instructional and assessment materials, and professional and scholarly journals, databases and software in all formats.

By Senator Joni Ernst (R-IA)

Mexico and South Korea are racing for American beef and pork. In 2017 alone, the U.S. shattered records with beef exports hitting $7.27 billion and pork exports reaching $6.49 billion according to the U.S. Meat Export Federation. For my home state of Iowa, one of the largest producers in the United States of both, this trend is keeping Iowans employed and the rural economy strong.

What’s driving this acceleration in demand? To start, our farmers and ranchers offer a high-quality product that people crave and trust. But more broadly, this demand and export growth does not happen without the right regulatory policies and trade deals in place.

Recent headwinds reverberating through the White House, evidenced most recently by the President’s decision to implement tariffs on imported steel and aluminum (raising the possibility of a strong retaliatory response on agriculture exports), have many in agriculture and livestock production deeply concerned. President Trump has indicated that he is ready to tear up the North American Free Trade Agreement (NAFTA) and our FTA with South Korea or renegotiate new terms.  As we recently closed the seventh round of negotiations in Mexico City and have begun talks with Korea, it is clear that our agriculture industry is looking for answers.

I agree with the President on many things.  I also think his intentions on trade are good and flow from a strong desire to put America in the driver’s seat globally. A goal I share.  However, I do not share the President’s beef with the current agreements and hope we can land a resolution that modernizes NAFTA and fosters increased trade between the U.S., Mexico, and Canada.

In fact, NAFTA, and trade deals like KORUS FTA – the United States-Korea Free Trade Agreement – are keeping our farms and rural communities not just afloat, but at the forefront and rapidly growing. Far from an adversary, NAFTA is a boon to agriculture, allowing us to satisfy consumer demand that would otherwise be filled by nations like Brazil.

With all eyes on South Korea at the recent Winter Olympics where the world’s best athletes competed, let us bring attention back to the farm gate where some of the world’s hardest-working farmers and ranchers are competing for global market share. Spurred by the 2012 free trade agreement, South Korea is now the sixth largest market for U.S. ag products. The country of 51 million people imported $6.2 billion of agricultural products from the United States in 2016. KORUS has opened new, untapped markets across Asia – markets where the U.S. pork industry could lose the podium to Australia, Canada, Chile and the European Union if we were to revert back to pre-KORUS tariffs.

This is why I continue to lead a vocal effort to communicate the benefits of trade and a “do no harm” approach to the President and other key Administration officials.  My hope is these conversations with our allies start and finish with the premise that these agreements should be preserved.

Keeping the U.S. globally competitive has many levers. We recently passed a tax reform bill that will provide Americans needed tax relief while allowing our U.S. businesses to remain competitive and chart a path of expansion. I was proud to work with my Republican colleagues and President Trump to get this across the finish line.

Similarly, our trade deals ensure American exports remain strong and our economy growing. We should give producers a competitive advantage, not a disadvantage, and search for ways to showcase American products across the globe to meet the growing middle-class’ demand. Teaming this effort with regulatory reform to reduce red tape on a highly-regulated industry, we can create a recipe for success that will continue to push American exports to the top of the leaderboard.

Joni Ernst is a United States Senator from the State of Iowa and serves on the Senate Agriculture, Nutrition, and Forestry Committee and the Senate Armed Services Committee. The views expressed here are the author’s alone. 

Photo from Rich’s photostream on flickr Creative Commons.

By Phil Eskeland

The Foreign Trade Division of the U.S. Census Bureau released the latest monthly trade statistics earlier today, revealing the annualized services trade data for 2017. The news with respect to U.S. trade with the Republic of Korea (ROK) was encouraging. Not only did the U.S. achieve record levels of services exports to South Korea of $23.2 billion in 2017 (on top of the record level in merchandise goods that we learned about last month), but the bilateral trade deficit in both goods and services between the two countries fell 41 percent from 2016 levels. As a result, the U.S. trade deficit with Korea in goods and services declined by $7.3 billion and the ROK fell to 9^th place in terms of individual countries with a trade deficit with the United States.  In contrast, the overall U.S. trade deficit with the rest of the world went up by 12.6 percent or $63.6 billion, including growing U.S. bilateral goods and services trade imbalances with China, Taiwan, Mexico, Italy, and Germany.

Since the Korea-U.S. Free Trade Agreement (KORUS FTA) took effect, the U.S. trade surplus in services with Korea has increased by 77 percent to a record $12.2 billion, in part, because U.S. service exports to the ROK grew from $16.7 billion in 2011 to $23.2 billion in 2017.  One reason for the increase in U.S. service exports is the number of South Koreans who visit the United States continues to grow.  International travel is considered a service export, so tourists or business travelers who come from overseas should be encouraged.  While the U.S. has experienced an overall 1.8 percent decline in visitors from all over the world (mostly from Mexico, Great Britain, China, and Brazil), South Korea is the one major exception with a 17 percent increase of its citizens travelling to the United States for business or pleasure when comparing the first eight months of 2017 to the same time period in 2016.  According to the International Travel and Tourism Office at the U.S. Department of Commerce, the typical South Korean visitor spent an average of $4,370 in the U.S. during 2016.  As a result, South Korean travelers contributed $8.6 billion to the U.S. economy, helping to boost U.S. service exports.

Thus, as the Administration considers various trade policy actions that could affect South Korea, it should keep in mind the positive role the ROK has played in alleviating the main concern of President Trump with respect to lowering the bilateral trade deficit in favor of the United States.  While there is no guarantee that this declining trend can be continued indefinitely, particularly in light of the tax cuts that were recently signed into law, Korea should be recognized as a strong U.S. ally not just on security matters, but also in the area of trade.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.

Photo from the Republic of Korea’s photostream on flickr Creative Commons.