By Phil Eskeland 

“As Vice President… [Joe Biden] backed the horrendous South Korea trade deal, which took many jobs from our country which I reversed and made a great deal for our country.”

Remarks of President Donald J. Trump upon accepting the Republican nomination for President, August 27, 2020 (President’s extemporaneous remarks in italics)

Last Thursday night, President Donald Trump accepted the Republican nomination for a second term as President of the United States.  Every speech at political events contains embellishments, and this one was no exception.  President Trump’s remarks returned to the main themes that have animated his political beliefs for most of his lifetime, particularly on implementing his vision of fair and reciprocal trade.  In his list of alleged “blunders” committed by Vice President Joe Biden over the previous 47 years of public service, President Trump not surprisingly focused on four trade policy matters that represented the bipartisan and establishment consensus at the time – Biden’s votes, as a U.S. Senator, for the North American Free Trade Agreement (NAFTA) and China’s accession into the World Trade Organization (WTO) and the Obama-Biden Administration’s actions on negotiating the Trans Pacific Partnership (TPP) and passing the Korea-U.S. Free Trade Agreement (KORUS FTA) into law.

President Trump generally stuck to his prepared remarks throughout most of his acceptance speech, and only occasionally adlibbed, usually for emphasis.  However, the President improvised the last section of the sentence dealing with KORUS in which he said he “reversed” the trade agreement and then “made a great deal for our country.”  Yet, most of the underlying text of the original KORUS FTA remains unchanged.  In 2018, the Trump Administration negotiated a handful of modest adjustments to the agreement, most notably an extension of the 25 percent U.S. tariff on imported trucks from Korea for another 20 years and allowing more U.S. motor vehicles and parts to enter South Korea based on meeting U.S. environmental and safety standards.  Separate from the minor modifications to KORUS, Korea also agreed to voluntarily limit its exports of steel to the United States to avoid higher American import duties.  Since the adoption of this side agreement, the volume of Korean steel exports to the U.S. has declined by 31 percent or by $523 million in value, but possibly at a cost of higher prices and increased scarcity of supply to U.S. steel-using manufacturers.

Despite this difference on steel, the overall trend in the U.S.-Korea trade relationship continued to flourish after the implementation of the KORUS FTA in 2012, with most years showing a growth in U.S. exports of both merchandise goods and services to Korea.  At the same time, the bilateral trade deficit between the U.S. and South Korea declined to a low of $4.5 billion in 2018 after initial increases due to factors unrelated to KORUS, including falling agricultural commodity prices.  If one continues to use the metric from the Department of Commerce that every $1 billion in U.S. exports supports approximately 5,700 American jobs, the nearly $20 billion growth in U.S. exports to South Korea since 2012 created or supported approximately 112,000 U.S. jobs, beating the Obama Administration’s prediction that KORUS would support 70,000 U.S. jobs in 10 years.  This is on top of the $36.6 billion in new investment from Korea that has come into the United States since 2012 to employ at least 58,000 Americans.  The results of KORUS are precisely the opposite of what was said last Thursday night because the facts show the accord produced more U.S. exports and jobs as intended.

After the Trump Administration’s “great deal” with Korea to modestly modify KORUS in 2018, the bilateral goods and services trade deficit crept back up to $7.4 billion in 2019.  This is not the Administration’s fault because U.S. goods and services exports to Korea grew in 2019.  However, American consumers continued to purchase Korean products at a higher rate, ranging from advanced technology products, such as Samsung smartphones, to higher-value auto imports from Korea, such as the Hyundai Genesis luxury car or Kia’s Niro electric/hybrid vehicles.  The larger bilateral U.S.-Republic of Korea (ROK) trade deficit serves as another reminder that using trade policy as the sole tool to lower the trade deficit is bound to fail because larger macro-economic forces are at play.  The U.S. should continue to promote exports and combat illegal trade practices, but the impetus for these policies should not be to reduce the trade deficit because that is a fools-errand.  As the independent Congressional Budget Office (CBO) tactfully concluded in its 2000 report to Congress on the causes and consequences of trade deficits “…if one nevertheless wanted to reduce the (trade) deficit, trade policy would not be a good way to accomplish that goal.”  Would the U.S.-ROK trade deficit be even higher without the President’s action in 2018?  Perhaps, but no one can accurately predict the alternative outcome.

As the presidential campaign continues, President Trump and his team should drop the hyperbolic language from the past about the KORUS FTA, closely analyze the updated trade statistics to modify the rhetoric, and use this agreement as a model to encourage other countries to enter trade deals with the United States.  The facts show the KORUS FTA has worked as intended.  Instead, the focus should be on the future efforts to knock down barriers to trade so that the U.S. can return to historically high levels of export growth once the global pandemic is over.

Phil Eskeland is the former Executive Director of KEI and Policy Consultant at Gammon & Grange, P.C. The views expressed here are the author’s alone. 

Image from Wikimedia Commons.

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

As we continue to examine the effect of the Korea-U.S. Free Trade Agreement (KORUS FTA) on its 7^th anniversary, one of the major sticking points in the negotiations was the treatment of various agricultural products.  Because South Korean tariffs on agricultural imports were very high (averaging 55.4 percent vs. 3.8 percent for the United States), there were predictions that the U.S. agricultural community would disproportionately gain from KORUS as various tariffs and import quotas were eliminated or dramatically reduced.  Much of the strongest support for KORUS came from the U.S. farming and ranching community during the process to pass the KORUS implementation legislation into law back in 2011.

The economic analysis conducted by the independent U.S. International Trade Commission prior to Congressional passage of KORUS confirmed these suppositions.  The USITC concluded that “agricultural exports to Korea that would be likely to increase…include grains, oilseeds, animal feeds, fruits, vegetables, seafood, and various processed foods and nonalcoholic beverages.”  The USITC also concluded that the largest agricultural sub-community to benefit from KORUS in terms of an increase in output and employment would be the meat sector.

However, in the few years after KORUS went into effect in 2012, the overall export level of U.S. agricultural products to Korea did not live up to expectations.  While exports to Korea of U.S. consumer-oriented agricultural products (i.e., beef, nuts, wine, cherries, etc.) and intermediate goods (i.e., soybean and vegetable oil) grew since KORUS implementation, the value of most bulk agricultural commodity products (i.e., corn, wheat, soybeans), shrunk.  Some groups critical of the KORUS FTA used these results to justify their reasons to scuttle the agreement, but they overlooked the dramatic decrease in prices for commodities in contributing to the decline in the value of U.S. agricultural products to Korea.

However, despite the continuation of low prices for various bulk agricultural commodities, the U.S. exported record levels of agricultural products to Korea, going from nearly $7 billion in 2011 to a record $8.3 billion in 2018.  South Korea is America’s sixth largest export market for U.S. agricultural products, which is remarkable for a country that is ranked 27^th in the world in terms of population and 11^th in the world in terms of Gross Domestic Product (GDP).

How did the export performance of various agricultural sectors compare against initial predictions?

For grains (corn, wheat, rye, etc.), the USITC initially predicted KORUS would have a “negligible impact of U.S. grain exports to Korea” – a modest $7 million increase for corn and $2 million for wheat.  However, the USITC could not have foreseen the dramatic decline in agricultural commodity prices and the 2013 drought in the Midwest that affected the availability of these crops for export.  Nonetheless, in terms of metric tonnage, Korea increased its purchase in 2018 of wheat and corn by 9 and 22 percent respectively from 2011 (pre-KORUS) levels.  Just in the last year alone, Korea purchased an additional 3.3 million metric tons of corn from American farmers, providing them an alternative export market as trade tensions with China mounted.

With respect to oilseeds, the USITC projected that KORUS would have a “significant positive impact on U.S. oilseeds exports to Korea,” estimated at a 5–11 percent increase.  What has happened in the intervening years?  In 2018, Korea’s purchases of U.S. soybeans increased 23 percent in value and 71 percent in quantity as compared to 2011 levels, exceeding initial estimates.

Finally, one of the most politically sensitive issue the KORUS negotiations was the treatment of U.S. beef products.  The USITC predicted that KORUS would “likely result in increased U.S. exports of meat to Korea.”  Once Korean tariffs were phased-out on U.S. beef products in 15 years (or by 2027), the USITC predicted U.S. beef exports would increase by $0.6-1.8 billion or between 58 and 165 percent.  What are the results halfway into the tariff phase-out?  Already, sales of U.S. beef in Korea are up over $1 billion from 2011 levels, representing a 155 percent increase.

These results once again show that the initial criticism of the KORUS FTA was premature and unjustified.  KORUS has worked particularly well for U.S. agriculture, even during declining commodity prices.  Withdrawing from KORUS back in 2017 would have produced even more heartbreak in the American heartland and depressed farm prices even further.  Fortunately, the Trump Administration listened to the U.S. farming and ranching community by leaving the agricultural provisions untouched in the KORUS renegotiation talks, allowing the agreement to work as intended.

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 Phil Eskeland

Earlier today, the Foreign Trade Division of the U.S. Census Bureau revealed the latest set of monthly trade statistics.  The September release of July trade figures gives an opportunity for a mid-year review on trends not only in goods, but also in services trade with all nations of the world, including South Korea.  In today’s release, information about 2nd Quarter services trade statistics was made publicly available. [1] 

Not only did the six-month bilateral goods and services trade deficit between the U.S. and South Korea decline by 73 percent as compared to last year, but this continues a trend that began mid-2016.  The main reason for the dramatic decline in the overall bilateral trade deficit is the sustained growth in exports of both U.S. goods and services to Korea. America’s trade surplus in services to South Korea once again expanded this year by $355 million to reach $6.4 billion during the first six months of 2018.  U.S. exports of merchandise goods also continued its steady rise, increasing by 11.1 percent over the course of the first seven months of this year, particularly in the energy sector where thus far in 2018, the U.S. has exported $2.7 billion in oil and gas products to Korea $200 million shy of all oil and gas exports in 2017.

Korea is now ranked ninth – behind countries such as France, Italy, Japan, and Mexico – in terms of nations with any significantly measurable trade deficit with the United States.  Only Korea and India reduced their overall YTD 2018 trade imbalance with the United States. However, for India, the trade deficit reduction only amounted to a modest 2.4 percent decline.

This action all took place before any changes to the Korea-U.S. Free Trade Agreement were finalized and implemented.  This demonstrates once again that South Korea is a strategic and valuable ally not just on security matters, but also on trade.  As the Trump Administration considers possible further action on trade, it is important to bear in mind that the Republic of Korea is America’s only major trading partner and ally that has taken concrete action to significantly reduce its trade imbalance with the United States.  

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 Cycling Man’s photostream on flickr Creative Commons.

[1] Quarterly data on services trade is only available from 2013 onward.

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 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 Kyle Ferrier

It may have just been bravado to further his image as a tough negotiator, but President Trump’s comments suggesting that the withdrawal of U.S. troops on the Korean Peninsula may be on the table is problematic to say the least. Leaked comments from a private fundraiser on Wednesday revealed the president stated, “We have a very big trade deficit with [South Korea], and we protect them.” He further went on to say, “We lose money on trade, and we lose money on the military. We have right now 32,000 soldiers on the border between North and South Korea. Let’s see what happens.” The claims about the trade deficit are nothing new, despite significant evidence to the contrary, nor is the president playing security and economic issues off one another. However, if the president thinks he can leverage U.S. troops in Korea for any political or economic gain he is woefully mistaken.

The U.S.-South Korea military alliance is the backbone of the bilateral relationship. “Forged in blood” by the Korean War, the alliance continues to serve the shared interest of both countries through stabilizing the region as well as promoting economic openness and, since the late 1980s, liberal democracy. While the spread of communism is no longer the threat it was perceived to be during the Cold War, the North Korean threat remains, which is why even though South Korea is one of the world’s most advanced countries, the military component of these ties is vital. One of Trump’s biggest criticisms of the bilateral relationship is that South Korea has gotten away with exploiting the U.S. economy because of security concerns, yet the necessity of the alliance arguably helped to create a fairer trade deal for the United States. The alliance has also been the gateway to cooperation in a number of other global issues such as in space exploration, global health, and cybersecurity.

The closest the U.S. has ever been to withdrawing troops from the peninsula is also not coincidently the lowest point in U.S.-Korea relations. From 1977 to 1979, President Jimmy Carter was seriously considering the gradual removal of all U.S. troops from the peninsula over the South Korean government’s human rights record. The issue was a source of great consternation between the two governments and stoked Korean fears of abandonment. In the end, only about 3,000 troops left South Korea because the North Korean military proved to be a larger threat than previously thought. The potential for further withdrawal was resolved on its own after Carter pushed the decision back to 1981 in what would have been his second term in office, but by then there was new leadership in both Seoul and Washington.

Flash forward to today, the North Korean threat is similar in many ways but the evolution of Pyongyang’s nuclear and missile programs greatly raise the stakes for Washington. As a treaty ally, the United States is bound to defend South Korea in case of an attack. Thus, everything the alliance encompasses—including the 28,500 U.S. troops in South Korea, joint military exercises, and the U.S. nuclear umbrella—acts as a deterrence against North Korean aggression. Should this disappear now, tied to a negotiating tactic on trade or otherwise, South Korea would be at tremendous risk. This would jeopardize all of the added benefits the U.S. receives from relations with South Korea, including economic gains from bilateral trade as well as from regional stability. This is the same as it would have been in the late 1970s, though the benefits now are much are larger than they were 40 years ago. The biggest difference now, however, is North Korea is almost, if it isn’t already, capable of reaching the United States with a nuclear weapon. While the threat of military retaliation after an attack on the U.S. is undoubtedly a deterrent, this could easily be weakened if the U.S. were to abandon South Korea. After all, deterrence is a combination of both will and capability. Should the first half be questioned, Pyongyang could be emboldened to strike first.

Even if the president was trying to talk tough and has no intention to formally bring the issue up with Seoul, let alone follow through on it, the public discussion of troop withdrawal could have disastrous implications for U.S. interests. There is a confluence of factors, such as the return of great power politics between Washington and Beijing, now influencing Seoul that could force it to go off the well-worn path of firm resolve and close coordination with the United States. Though this is still the best way forward as CFR’s Scott Snyder argues in his new book “South Korea at the Crossroads,” should its feasibility come into question, Seoul may look to pursue other options even before the U.S. takes any action. Many of these options—such as obtaining nuclear weapons, which has gained some popularity in recent months, and closer ties with Beijing—would not only run counter to U.S. interests in the region, but on the global stage as well.

The best course of action for President Trump would be to immediately walk back the comments he made at the fundraiser and reaffirm the strength of the alliance by using well-trodden language, such as calling it “ironclad” and claiming there is “no daylight” between the two countries. At the very least it would be wise to quietly let this idea die. Trump may think it is a power play at the negotiating table, but should he pursue this further, he would actually be raising the white flag to Pyongyang and Beijing. He would risk setting off a chain of events that would ultimately put the U.S. in a worse position on trade with South Korea and at a strategic disadvantage in dealing with the most pressing regional security threat and global rival.

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 Expert Infantry’s photostream on flickr Creative Commons.