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.

By Phil Eskeland

Recently, the Foreign Agricultural Service (FAS) of the U.S. Department of Agriculture (USDA) released 2017 trade statistics showing that the value of U.S. agricultural related exports to South Korea reached $7.55 billion, very close to the same level as in 2011 ($7.58 billion), the year before the implementation of the Korea-U.S. Free Trade Agreement (KORUS FTA). Korea is now America’s sixth largest market for agricultural exports.  Using the USDA estimates, U.S. agricultural exports to Korea kept over 60,000 Americans employed in 2017, mostly located in the rural heartland, and have generated nearly $9.6 billion in additional economic activity in the United States. The U.S. also still runs a massive trade surplus in agricultural trade with South Korea, totaling $6.3 billion for 2017.

Because South Korean tariffs on agricultural imports were previously very high (averaging 55.4 percent vs. 3.8 percent for the U.S.), there was heightened expectation that U.S. agricultural exports to Korea would soar as tariffs on U.S. agricultural products were either eliminated immediately (i.e., on almonds, cherries, and wine) or were gradually phased out over time (i.e., on beef, cheese, and pork). For many specific product areas, U.S. exports did dramatically climb.  Most notably in one of the more contentious items negotiated in the KORUS FTA, U.S. beef exports to South Korea grew 78 percent, from $686 million in 2011 to $1.22 billion in 2017, as the tariff rate has been gradually ratchetting down from 40 percent. However, why has the aggregate number with respect to U.S. agricultural exports to Korea remained essentially frozen during these past six years?

The answer can be primarily found in falling prices for basic farm commodities.  In all but one sub-category of agriculture-related products, U.S. exports of these items to Korea have increased since KORUS came into effect. Since 2011, exports of U.S. consumer-oriented food products, such as beef, fruit juice, nuts, and wine to Korea have increased overall by 47 percent. Exports of U.S. intermediate agricultural goods to Korea, such as soybean and vegetable oil, have increased 11 percent since 2011.  Exports of agricultural-related products, such as distilled spirits, forest and fish products, to Korea have also increased by 10 percent during that same time period.  What has not increased is the dollar value of bulk commodity exports such as wheat, corn, and soybeans. U.S. exports of these products to Korea have declined in value by 44 percent between 2011 and 2017.

Some groups critical of the KORUS FTA have seized upon the drop in the value of U.S. agricultural exports to Korea, but conveniently omit that prices for commodities have fallen and overlook the fact that for many commodities, the quantity of these exports has increased even as U.S. exporters receive a lower remuneration for their product. Thus, just examining the value of certain agricultural exports misses the broader picture. The drop in bulk commodity prices unfortunately began to occur during the implementation year of the KORUS FTA in 2012, for reasons unrelated to the agreement, and have still yet to recover. This slump in commodity prices over the past five years has cut total U.S. farm income in half.

In 2017, three commodities formed 75 percent of all bulk U.S. agricultural exports to Korea:  corn, wheat, and soybeans. The price for all these commodities dramatically declined since 2011, some as much as 50 percent. For example, even though the U.S. exported more wheat to Korea (in terms of volume) in 2017 than in 2011, the monetary value of that export declined by $138.6 million because the price of wheat fell by 37 percent during that same time period.

U.S. corn exports have a similar, but more complicated story. The U.S. exported 5.9 million metric tons of corn to Korea in 2011, valued at $1.8 billion. For the next two years, American exports of corn dramatically declined, not just to Korea, but all around the world due to a drought in the United States. As a result, corn growers in other parts of the world took advantage of America’s misfortune to meet the demand for corn in other countries that the U.S. previously supplied.  The Economic Research Services at the USDA reported that “…farmers (in the Southern Hemisphere) plant their corn after discovering the size of the U.S. crop, thereby providing a quick, market-oriented supply response to short U.S. crops. Several countries–including Brazil, Ukraine, Russia, India, and South Africa–have had significant corn exports when crops were large or international prices, attractive. South Korea is a price-conscious buyer…willing to buy corn from the cheapest source.” After the drought, the price for corn dropped by over 50 percent, going down from its height of $6.89 per bushel in 2012 during the drought to the present level of $3.30 a bushel. The U.S. is still trying to regain market share in Korea with the export of 4 million metric tons of corn in 2017 (33 percent decline in quantity from 2011 levels), but only received $705.3 million for this same product (representing a greater decline of 61 percent in value).

To put this another way, if prices for corn, wheat, and soybeans in 2017 remained the same as they were in 2011, the value of U.S. bulk agricultural exports to the ROK would have increased 28 percent or by nearly $400 million.  As a result, the total value of U.S. agricultural exports to South Korea would have surpassed the previous record set in 2011 to reach $7.93 billion if agriculture commodity prices had remained stable during the past six years.

In sum, the latest release of agricultural trade statistics continues to demonstrate the value and benefits of the KORUS FTA. Even with a drop in world farm commodity prices, the U.S. is able to capitalize on lower tariffs to offer high quality and lower cost American farm products to Korean consumers. The U.S. should not undermine its current massive bilateral trade surplus in agriculture with Korea and further depress American farm income by terminating KORUS. That will only result in Korean tariffs on U.S. agricultural products snapping back to an average of 55 percent and U.S. farmers losing opportunities to sell their goods to a growing customer base in 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 hopeless128’s photostream on flickr Creative Commons.

By Phil Eskeland

Earlier this morning, the U.S. government revealed that the U.S. surpassed all previous records in exporting manufactured and agricultural goods to the Republic of Korea (ROK), reaching $48.3 billion for 2017.  This trend started approximately 1 ½ years ago, but the previous year’s annualized trade data did not fully reveal this development because of the relatively low U.S. export levels during the first few months of 2016.  As a result, some prematurely criticized the Korea-U.S. Free Trade Agreement (KORUS FTA) as the explanation for why fewer U.S. goods were being sold in Korea in 2016 because the analysis simply compared two sets of annualized data from 2011 and 2016 without digging a bit deeper behind the statistics.  With only two exceptions, the U.S. exported at least $3.5 billion worth of products each month to Korea since May 2016, including seven separate months when U.S. exports exceeded $4 billion.  In fact, U.S. merchandise exports to Korea in December 2017 tied a record level of $4.5 billion that was previously set last May.  As a result, U.S. merchandise exports levels to Korea in 2017 grew over 11 percent from pre-KORUS FTA levels (2011).

These high U.S. export levels assisted in reducing the bilateral merchandise trade imbalance between the U.S. and South Korea by 19 percent from the previous record high in 2015.  Thus, while the global U.S. merchandise trade deficit grew in 2017, the bilateral trend with respect to Korea went the opposite direction.  Instead of rising in ranks as a country with a large merchandise trade deficit with the United States, Korea dropped two positions.  Now, countries as diverse as Ireland, Italy, and India have a larger trade deficit in goods with the U.S. than South Korea.

This achievement is even more remarkable because the most recent set of data does not include trade in services information.  The 4^th Quarter trade in services statistics will be released by the Commerce Department on March 7^th to reveal a complete picture of the U.S.-Korea trade relationship for 2017.  However, if past is prologue, one can expect continued growth in both U.S. service exports to Korea and a continued bilateral trade surplus in services for the United States.  U.S. service exports to Korea grew 26 percent between 2011 and 2016, producing a $10.1 billion surplus for the United States.  Thus, the overall bilateral trade deficit in goods and services between the U.S. and South Korea may drop to as low as $10 or $12 billion.

Despite these significant accomplishments in record U.S. exports to Korea that has helped to lower the trade deficit, these trends may not hold up in the coming years ahead. While Korea has committed to purchasing more U.S. products valued at $57.5 billion during the next several years, this does not a guarantee that the bilateral trade deficit will continue on a downward trajectory.  In addition, any modifications or amendments made to the KORUS FTA will also not guarantee a reduction in the bilateral trade deficit.  As the independent and non-partisan Congressional Budget Office (CBO) noted years ago, “[t]he cause [of the U.S. trade deficit] lies not in international trade but in factors affecting international capital flows…[I]f one nevertheless wanted to reduce the deficit, trade policy would not be a good way to accomplish that goal… In general, the government policies that are most likely to have a large impact on the deficit are not trade policies but budget policy and any other policies that substantially influence saving and investment in the economy.”

Now that the President Donald Trump signed the Tax Cuts and Jobs Act into law, the U.S. Gross Domestic Product (GDP) could increase by about 0.7 percent, employment by 0.6 percent, and consumption by 0.7 percent.  When the U.S. economy has improved in the past, this has resulted in increasing the trade deficit as well because Americans purchase more imports as more money flows through the economy.  In addition, because South Korea’s economy is only approximately one-tenth of the size of America’s with 51 million people (the population of California, Oregon, and Washington in a geographic space slightly smaller than Pennsylvania), the ROK can only drive up domestic demand by a small fraction of what can be accomplished in the United States.  Thus, the effect of Koreans buying more U.S. imports is far smaller than the purchasing power of 327 million Americans.

The trade deficit is often a misused and inappropriate metric to determine the overall benefit of an economic relationship with a specific country, particularly if the statistic omits services trade.  One must have a full set of information, placed in context, in order to formulate an informed opinion regarding the value of free and open trade.  Nonetheless, more U.S. exports to South Korea reflect the value of the KORUS FTA because it shows that the agreement has lowered trade barriers in many key sectors that have opened new export opportunities for American companies and workers.

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 Saik Kim’s photostream on flickr Creative Commons.

By Mark Tokola, Phil Eskeland, Troy Stangarone, Jenna Gibson, Kyle Ferrier, Sang Kim, and Juni Kim

As we look ahead to what might occur in 2018 we should also consider how key events from 2017 will continue to shape the year ahead. In 2017, there was significant change on the Korean Peninsula. South Korea underwent political change as the Constitutional Court approved the impeachment of conservative President Park Geun-hye, opening the door to early presidential elections in May and the election of progressive Moon Jae-in. North Korea made significant advancements in its nuclear and missile programs, with both North and South Korea beginning to adjust to the changes brought by U.S. President Donald Trump.

After a year of growing tensions on the Korean Peninsula from North Korea’s nuclear and missile advances and concerns over war between the United States and North Korea, one of the key questions for 2018 will be whether the crisis will fester or will there be an opportunity to reduce tensions? There will also be significant focus on the impact of sanctions on the North Korean economy and whether they can change Kim Jong-un’s calculus.

However, 2018 will not only be about North Korea. In February, South Korea will welcome the world to PyeongChang for the 2018 Winter Olympics. While the Games will be a celebration in South Korea, there is also hope that they will help to reduce tensions on the Korean Peninsula.

With that in mind, here are 10 issues related to North Korea, South Korean politics, and U.S.-Korea relations to follow that will have an impact on the Korean peninsula in the year to come:

Could War Break Out on the Korean Peninsula?

With the leaders of North Korea and the United States fighting over nuclear buttons, it is hard to imagine a more precarious situation on the Korean Peninsula going into 2018. But war can, and most likely will, be avoided as long as cooler heads in Washington and Pyongyang prevail.

Security and international relations experts have long debated whether Kim Jong-un is a rational actor and if a nuclear North Korea obeys the same rules of deterrence that kept full-scale conflict at bay during the Cold War. Many firmly believe that North Korea can indeed be deterred, and that preventative military action is unnecessary and dangerous.

The key will be to keep communication and coordination between Seoul and Washington tight. Allowing North Korea or China (or even unrelated issues like the Korea-U.S. Free Trade Agreement renegotiations) to drive a wedge between the two allies could provide enough confusion and uncertainty to allow a miscalculation to get out of hand.

The Impact of Sanctions on North Korea

One of the key issues for 2018 will be the impact of sanctions on the North Korean economy. Much of the international strategy for dealing with North Korea’s nuclear weapons and missile programs so far has been built around the strategy of using increasing economic pressure to bring North Korea to the negotiation table.

In 2016, North Korea’s economy was estimated to have grown nearly 4 percent despite increasing United Nations sanctions. Estimates for 2017 won’t be out until later this year, but the UN Security Council has passed four new resolutions imposing greater sanctions on Pyongyang and one would expect economic growth to slow. North Korea is now banned from exporting coal, which was its largest export item, as well as other goods such iron and lead ore, textiles, fish and agriculture products, wood, and machinery. The sanctions have also placed greater constraints on North Korean financial transactions and require all of North Korea’s overseas laborers to be sent home in one year. The vast majority of North Korean exports have been banned and limits have been placed on oil exports to North Korea.

As a result of the sanctions, North Korean exports to China are down $573 million compared to 2016 through November of last year. Most of the decline has come towards the end of 2017 when many of the sanctions began to come into effect. Will sanctions continue to lead to a decline in North Korea’s official trade? Will North Korea be able to increasingly evade sanctions as it appears to with reports of Russian and Chinese ships transferring oil to North Korea in violation of UN sanctions? Will the sanctions begin to have a significant impact on the North Korean economy, perhaps in the form of a currency crisis, that will begin to place pressure on the regime to enter into talks on its weapons programs? The new year should give us some insight into these questions.

The Advancement of North Korea’s Nuclear and Missile Programs

North Korea displayed disturbing advancements in missile and nuclear technology in 2017, including three successful intercontinental ballistic missile (ICBM) tests and a nuclear test in September showing North Korea’s highest yield yet. Each successive ICBM test conducted by Pyongyang demonstrated greater altitude and reach, with the most recent test in November estimated to be capable of hitting anywhere within the United States.

Despite a new series of UN sanctions passed in 2017 aimed at curbing North Korea’s weapons progress, 2018 will likely see North Korea continue to test the international community and demonstrate further advances in their weapons technology. Although North Korea established its ICBM advances in the past year, North Korea has yet to display missile re-entry capability, which would be a critical part of the country’s ability to launch a potential attack. North Korea may also seek to conduct more satellite tests and submarine-launched ballistic missile (SLBM) tests to emphasize the regime’s expanded weapons capabilities, as well as expand its stockpile of missiles and warheads.

The 2018 Winter Olympics

The 2018 Pyeongchang Winter Olympics will be the second time that South Korea has hosted the Olympic Games after it held the 1988 Summer Olympics in Seoul. This will also be the first of three consecutive Olympic Games held in East Asia with the 2020 games to be held in Tokyo and the 2022 games to be held in Beijing. In regards to local hopes for Olympic glory, South Korean athletes have traditionally had a dominant presence in speed skating, and a predictive analysis by Gracenote currently estimates another strong performance in the sport with a projection for South Korea to finish sixth in the overall Gold Medal count.

Despite local enthusiasm for the Games, lagging ticket sales have been attributed to international concerns over North Korea’s provocative behavior. In a New Year’s address, North Korean leader Kim Jong-un voiced openness to North Korea’s participation in the Winter Games. In response, South Korean officials have proposed talks to discuss North Korea’s involvement next week, which if obtained would be a significant development for South Korea and its hope to reassure a worried international audience. North Korea’s participation would also be a huge political win for South Korean President Moon Jae-in, who campaigned on improving inter-Korean relations through dialogue and convinced the United States to postpone annual exercises until after the Olympics.

Special Measures Agreement/Burden Sharing

President Donald Trump recently reiterated his campaign rhetoric and long-held belief that the U.S. “defends nations that are very wealthy, and we do it for almost nothing.” In this same speech in Missouri, President Trump relayed his conversations on defense burden sharing with a “couple of countries” during his recent trip to Asia that he believes are “getting away with murder and they got to start helping us out.”

Ever since 1991, the Republic of Korea (ROK) has provided some financial support to offset the cost of stationing U.S. troops on the peninsula. In 2016, General Vincent Brooks testified before the U.S. Senate that South Korea pays approximately 50 percent of the total non-personnel costs of the U.S. troop presence on the peninsula. Under the current SMA, Korea’s annual payment (in won) increases by the rate of inflation. In preparation for the President’s November trip to Asia, the White House highlighted Camp Humphreys as a “great example of burden sharing.” In the same testimony cited above, General Brooks confirmed that South Korea has paid about 91 percent of the cost of this base relocation.

In 2018, South Korea and the United States will negotiate a renewal of the Special Measures Agreement (SMA), which is set to expire later this year, to lay out the terms of the burden sharing arrangement for the next several years. As in most negotiations, both sides start off with their most extreme position. Over time, the two sides come together to reach an agreement.  SMA negotiations will be tough with the Trump administration. However, experienced personnel in the Defense Department will continue to recognize Korea’s immense contribution to the alliance (i.e., devotes 2.7 percent of its GDP to its own defense; has military draft; has, in the past, contributed its own troops to support the U.S. in other conflicts; and purchases a significant share of its imported military equipment from the U.S.) and will not let the SMA talks undermine the U.S.-ROK alliance.

U.S.-Korea Trade Policy

President Donald Trump continued his campaign rhetoric to criticize past U.S. trade policy, including the Korea-U.S. Free Trade Agreement (KORUS FTA), as a source of job loss and economic desolation in the United States.  He was on the cusp of withdrawing from KORUS and had the paperwork prepared to sign, but was persuaded at the last moment by other senior White House aides to not take this action and instead work towards negotiating changes to the underlying agreement.

However, the impetus for renegotiating KORUS – a rising bilateral merchandise trade deficit between the U.S. and South Korea since 2011 – has dissipated over the past 18 months as the U.S. experienced a significant decrease in the bilateral trade imbalance in its favor.  While Trump Administration officials have finally recognized this fact, the goalposts have been moved to find “permanent solutions, not temporary forbearance,” to keep the U.S.-ROK trade imbalance low and possibly turn it into a surplus based on the philosophy of “free, fair, and reciprocal” trade. Nonetheless, the Trump Administration may run into its own self-imposed roadblock by not seeking major alterations to KORUS that would require changes to U.S. law, thus avoiding the need to trigger Trade Promotion Authority (TPA) and approval by Congress.

With formal negotiations set to begin on January 5^th, the same day as the release of next set of U.S. trade statistics for the month of November, some of the areas under possible amendments and modifications to KORUS are changes to Investor Settlement Dispute (ISD) process; elimination of more non-tariff barriers to U.S.-made vehicles; and reforms in areas of digital trade, privacy, and financial services.  Commerce Secretary Wilbur Ross also said that he hopes the KORUS renegotiation talks will go “quickly and smoothly” and that both sides will find “ways that work for all parties.”  If this solicitous spirit imbues the negotiation teams, an agreement can be found relatively soon.  However, if talks drag out because of unrealistic demands, this could have negative ramifications for other areas of the U.S.-ROK relationship.

Lastly, there are two other trade decisions in 2018 that could negatively affect South Korea with respect to U.S. government investigations into alleged “unfair” trade practices – (1) the Commerce Department study on the national security implications of imported steel is due on January 15^th, with a presidential determination within 90 days to possibly issue higher tariffs as a tool to protect the U.S. steel industry (Korea represents the third largest source of imported steel for the U.S.) and (2) the President has until February 2^nd to make a decision on possibly increasing tariffs on imported large residential washing machines made by Korean-owned companies LG and Samsung to protect Whirlpool (based in Ohio) from an alleged import “surge” (even though LG and Samsung will soon be manufacturing washing machines in the U.S., employing over 1,500 workers). Decisions to increase tariffs could prove to be additional irritants in the U.S.-ROK relationship, and could mar the KORUS talks.

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

In the summer of 2016, China began taking steps to apply economic pressure on South Korea over Seoul’s decision to deploy the U.S. Terminal High Altitude Area Defense (THAAD) system. By 2017, China was informally sanctioning South Korea’s tourism, entertainment, and auto industries, as well as Lotte directly for providing the land on which was deployed.  Altogether, the economic losses to South Korea from China’s boycott have approached $10 billion.

At the end of October, South Korea and China announced that they had agreed to normalize economic ties. While Beijing had insisted that the dispute would not truly be over until South Korea made the appropriate decision on THAAD, it looked at the time as though the two sides had agreed to disagree as China partially lifted its ban on group tours to South Korea. It was not meant to be. A little more than a month later it appears that China has re-imposed the tourism ban, and while South Korean automotive sales have improved in China it looks as though the retaliation over THAAD is set to continue into 2018. Rather than lifting its economic pressure on South Korea, look for China to moderate it over 2018 but to not completely lift its economic pressure.

Moon Jae-in’s Promised Economic Reforms 

The South Korean economy is projected to grow over 3 percent in 2018, led by recovering global trade expectations. However, the key issue to watch this year in the Korean economy is how effective the administration’s reform agenda will be in spurring domestic demand. Moon’s social and economic reform platform arguably won him the presidency and his implementation of it so far has sustained his high approval ratings. The popularity of Moon’s strategy stems from its rejection of past policies, reversing conventional economic thought by arguing job creation leads to growth.

Perhaps the most consequential advancement of the agenda thus far came was the budget passed by the National Assembly in December. The budget increased social welfare spending and created around 9,500 new public-sector jobs, both are major steps towards achieving Moon’s lofty goals.

While this new path could help to address Korea’s widening social problems and boost the domestic economy as a portion of overall GDP, it is still largely unproven. Whereas 2017 laid the groundwork for Moon’s ideas to be enacted, 2018 will be prove crucial in determining their success and sustainability. All of this could however be moot if burgeoning household debt is not reigned in.

South Korean Local Elections

South Korean domestic politics will face another bumpy road in 2018. The June 13^th local election will be the Moon Jae-in Administration’s first major political event and a litmus test for Moon’s first year. It could also change the political landscape for next four years.

With Moon’s continuous high approval rate, the Democratic Party of Korea has a strong advantage over its opponents. According to the Korea Times’ New Year public opinion poll, an overwhelming majority in Seoul, Busan and Gyeonggi providence said they will support Moon and the ruling party in upcoming local election.

However, opposition parties are hoping to flip the political tide in their favor. Ahn Cheol-soo, the leader of the People’s Party and the Bareun Party leader Yoo Seun-min have been pushing for their parties’ merger to attract the votes of centrists and moderate conservatives. Whether the synergy from the merge will be strong enough to make them the main opposition party ahead of Korea’s Liberty Party is debatable.

The major race to watch out for the June election will be the Seoul mayor’s race. The incumbent, Park Won-soon, will be the first Seoul Mayor in history to run for the third term. According to DongA Ilbo survey, Park has overwhelming support over other potential candidates.

With five months left until the election, there is a plenty of time for unexpected changes.

Hallyu’s Ongoing Rollercoaster Will Continue

The last year was one of extremes for Korean pop culture overseas. Starting in 2016 and continuing throughout 2017, the market for Korean cultural content in China began to dry up amid formal and informal boycotts over THAAD. After years of Hallyu fever in China, concerts by Korean artists and endorsement contracts for Korean celebrities have become few and far between.

Meanwhile, though, boy band BTS may have achieved what was once deemed impossible – breaking into the mainstream American market. After appearances on the American Music Awards and The Ellen Show, BTS topped off the year with a performance at Dick Clark’s New Year’s Rockin’ Eve, and broke their own record for the longest run by a k-pop group song on Billboard’s Hot 100 chart.

In 2018, expect more of the same for both these phenomena. Even if China lifts some restrictions this year, Korean entertainment companies will likely be reluctant to rush back into the Chinese market. In fact, some groups with a stronghold in China such as EXO, who releases all their music in both Korean and Mandarin, have shifted toward more Japanese releases.

Meanwhile, it remains to be seen where BTS’s success in the United States will take them, and whether their popularity will open doors for more mainstream interest in other k-pop acts.

And finally one bonus issue:

Will There Be Constitutional Reform?

President Moon Jae-in has promised to reform the South Korean Constitution and intends to hold a referendum on proposed changes in conjunction with local elections in June.  The 1948 Constitution has been amended nine times, with the biggest change in 1987, when presidency was changed to a single five-year term.  A two-thirds majority in the National Assembly will be required to pass the constitutional reform bill that would then be put to the referendum.

Although there is consensus that the current Constitution grants too much power to the President, there is no agreement on how to curb the President’s powers.  Suggestions include: introducing a four-year, two-term Presidency; increasing the powers of the Prime Minister, perhaps by making the Prime Minister responsible for domestic policy while leaving foreign and security policy to the President; giving greater autonomy to regional and local governments, perhaps in the areas of education and local finance; creating a system for ballot initiatives and a recall system for National Assembly Members to strengthen “direct democracy”; and changing the system of National Assembly elections to increase the influence of smaller parties.  President Moon, formerly a human rights lawyer, has also said that he is interested in strengthening human rights provisions of the Constitution.

The first half of 2018 will see a strong push for agreement on Constitutional revisions in time for a June referendum.  If the parties cannot agree on a proposal, Constitutional reform will become an issue for the 2020 National Assembly elections.

Mark Tokola is the Vice President of the Korea Economic Institute of America, Phil Eskeland is the Executive Director of Operations and Policy, Troy Stangarone is the Senior Director for Congressional Affairs and Trade, Jenna Gibson is the Director of Communications, Kyle Ferrier is the Director of Academic Affairs and Research, Sang Kim is the Director of Public Affairs and Intern Coordinator, and Juni Kim is the Program Manager and Executive Assistant. The views expressed here are the authors’ alone.

Image created by Jenna Gibson. Photos from William Proby and Korea Net on flickr Creative Commons, and from Wikimedia Commons.

By Troy Stangarone

In 2017, much of the world’s attention turned to the Korean Peninsula. South Korean politics underwent major changes as President Park Geun-hye became the first South Korean president to be removed from office and a snap election was held in May that saw the election of Moon Jae-in. North Korea also dominated the news as Kim Jong-un followed through on his promises to test an intercontinental ballistic missile (ICBM) and has raised concerns over the prospect of military action on the Korean Peninsula as North Korea has advanced its programs more quickly than many expected.

The changes in South Korean politics and North Korea’s progress on weapons development on their own could mark 2017 as a major turning point on the peninsula. However, we also saw the United States threaten to withdraw from the KORUS FTA and China perhaps put more pressure on South Korea over THAAD than North Korea over its nuclear weapons program. 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 2017 blog.

Looking back, we largely touched on what would be the key issues on the Korean peninsula in 2017. Though, in the case of burden sharing we may have been a year too early and there are reasons to believe late in 2017 that our prediction on relations between South Korea and Japan while right for 2017 may be challenged in 2018. Areas where we could have done better include more of a focus on North Korea’s desire to try and complete much of its weapons testing in 2017, how nations in East Asia would react to the U.S. withdrawal from the Trans-Pacific Partnership, and the impact that the impeachment of Park Geun-hye would have on the leadership of South Korean chaebol. With that said, here’s a brief look back at the 10 issues we highlighted and what happened:

1. Political Dynamics and the Presidential Election in South Korea

The impeachment of Park Geun-hye and the subsequent election of Moon Jae-in as president were two major events in South Korean politics in 2017. While the snap election won by Moon resulted in a victory for the leading contender rather than an upstart candidate hoping to take advantage of shifts in the South Korean political scene, it did see the rise of populism in South Korea as we have seen in much of world over the last couple of years. The difference being that populism in South Korea is being driven by the left rather than the right. While Moon’s election could have resulted in shifts in policy towards North Korea and Japan, he has largely represented continuity through his endorsement of President Trump’s policy of maximum pressure and his efforts to separate historical issues from policy more broadly with Japan. Though, he has moved to give the government a greater role in job creation in South Korea.

2. The Trump Administration’s Foreign and Security Policy in East Asia

Despite campaign rhetoric that accompanied President Trump’s run to the White House, U.S. foreign and security policy towards East Asia has remained largely the same. Much of the strong rhetoric about the need for allies to contribute more to their defense has remained, but the broader U.S. policy in the early part of the Trump Administration seems to have largely remained in place. The most significant difference to date may have come in the rhetoric designed to describe the Administration’s policy. The Trump Administration has decided to move away from using the Obama Administration’s Asia Rebalance to a new Indo-Pacific strategy, but it is unclear how different the policy will be in reality. Though, we could see greater differences in 2018 as negotiations on burden sharing with South Korea will need to be completed and North Korea’s

3. Trump Administration Asia Economic Policy

If U.S. foreign and security policy in East Asia has largely remained consistent, the same cannot be said of U.S. economic policy. Trade policy was the one area where it was clear President Trump intended to make changes. On the first day of the new Administration, President Trump followed through on his promise to withdraw from the Trans-Pacific Partnership (TPP) and shift from the use of multilateral trade agreements to bilateral trade agreements to advance U.S. interests. The Trump Administration has also pushed to renegotiate the U.S.-Korea (KORUS) FTA, which President Trump has consistently referred to as a “horrible” trade agreement and only North Korea’s nuclear test in September may have convinced the Trump Administration to renegotiate rather than withdraw from the agreement. It has also taken steps to use more U.S. trade remedies to push a harder line with China on its trade practices.

4. North Korean Behavior in Response to a New Political Environment

Despite announcing in his New Year’s Day address that North Korea was close to conducting an ICBM test, North Korea did seem to display some hesitancy in its testing in 2017 as it adjusted to the new Trump Administration in Washington, DC and there have been indications that Pyongyang is confused by Washington’s new policies. At the same time, North Korea did not conduct as many missile tests around the U.S.-South Korean military exercise in the spring and delayed conducting its first ICBM test until July. However, by the middle of the year North Korea seems to have determined that the new Administration would not be a break on its behavior and proceeded to conduct missile tests at roughly the same rate as in 2016.

5. Will North Korea be a Trump Administration Priority?

It was clear before the Trump Administration came into office that dealing with North Korea would be a foreign policy priority, but less so where it would rank in terms of priorities, especially given candidate Trump’s focus on China. However, addressing North Korea’s nuclear program has become the Trump Administration’s top foreign policy priority because of both the maturity of North Korea’s weapons programs and the growing threat they represent to the U.S. homeland and the region. As a result, President Trump has lessened economic priorities that he campaigned on, such as addressing trade with China, and offered Beijing a better deal on trade if it helped the United States deal with North Korea.

6. Are Sanctions Working?

This was one of the key questions for 2017 and will remain a top issue in 2018. Are sanctions working on North Korea? Sanctions have taken a toll as exports to China have fallen by $410 million through October compared to the same period in 2016 and some countries have begun completely cutting off trade, but they have created no discernable change in North Korea’s testing or willingness to return to talks. However, concerns we had at this time last year that there may be a turn away from sanctions have not yet come to pass. While some of the presidential candidates in South Korea had expressed a desire to reverse course on sanctions with North Korea, Pyongyang’s continued missile test and hydrogen bomb test have closed any avenue for engagement and a lessening of sanctions, easing those concerns. Though, there has been an increasing consideration of the use of military force in the United States to solve the North Korean nuclear issue.

7. Special Measures Agreement/Burden Sharing 

Because of the focus on this issue by candidate-Trump we had an expectation that it could come to the fore in 2017. Asides from the occasional rhetorical flash, it didn’t. However, in 2018 the United States and South Korea will need to conclude a new Special Measures Agreement to determine the level of burden sharing in the alliance. This may just be an issue deferred.

8. Will RCEP Be Finalized in 2017?

One of the expectations for 2017 was that if President Trump followed through on his pledge to withdraw from the TPP, it would help spur the Regional Comprehensive Economic Partnership (RCEP) to conclusion and help to provide China with a platform for supplanting the United States’ leadership in East Asia on economic issues. While China has sought to supplant the United States on trade, RCEP remains unconcluded and rather than withering the TPP is very much alive. The remaining members under Japanese and Australian leadership have sought to conclude the agreement and leave open the door to a U.S. return in the future. The regional response to the United States on trade has not played out how one would have expected.

9. Will the Korean Wave Continue?

The Korean Wave, or Hallyu, continued to grow in 2017 despite Chinese retaliation over THAAD. China is a key market for Hallyu content and products. As a result of THAAD, China prohibited the streaming of new K-dramas and banned group tours to South Korea where Chinese tourists purchase large amounts of Hallyu related products such as K-beauty. Both of these actions cut into profits from Hallyu, but there was also significant growth of K-beauty product exports to China as Chinese customers sought to make up for the loss of purchases from their trips to Seoul. While China’s measures have clearly cut into Hallyu, it has seen increasing success outside of China. One of the biggest new hits on U.S. TV, The Good Doctor, is the export of a South Korean drama and the growing enthusiasm for Hallyu can be seen at KCONs around the world as well as in the American TV debut of boy band BTS, who will be ringing in the new year in Times Square along with the world’s biggest artists. While China’s THAAD retaliation clearly represented a challenge to Hallyu, it continues to thrive.

10. Relations Between South Korea and Japan

The relationship between South Korea and Japan has developed largely as we expected. The 2015 agreement regarding the Comfort Women remains unpopular in South Korea and President Moon has said the South Korea could not “emotionally” accept the agreement. However, in contrast to the Park Administration the Moon Administration has worked to separate historical issues from other issues in the relationship. Shortly after his election President Moon spoke with Prime Minister Abe about North Korea and the two have met in a summit meeting during APEC and the trilateral meeting with President Trump on the sidelines of the UN General Assembly. While the growing threat from North Korea, along with President Moon’s reluctance to date to call for the Comfort Women deal to be revised or scrapped, has likely helped to maintain ties, a South Korean commission recently concluded that the agreement did not adequately take into account the views of the Comfort Women and could challenge this balance in the new year.

Beyond the events that we expected, here is a look at some of the unexpected events that helped to shape 2017:

1. North Korea’s Nuclear Successes

After a series of Musudan missile failures in 2016, few would have expected the progress shown by North Korea in 2017. However, 2017 saw Pyongyang make significant progress as it introduced the Hwasong 14 and 15 models for its three successful ICBM tests. Also, more than a year after claiming the successful test of a hydrogen device, North Korea successfully conducted it first test of a hydrogen bomb. While North Korea’s successes to-date may not quite complete their tests as Kim Jong-un indicated, they have brought North Korea significantly closer to being able to strike the U.S. homeland than many would have thought possible in 2017.

2. How Sanctions on North Korea have Changed

Prior UN sanctions on North Korea were designed to prevent North Korea from acquiring the technology that it needed to advance its nuclear weapons and missile development, but that began to change in 2017. While UN sanctions in 2016 began to move in this direction with caps on the export of coal, sanctions in 2017 prohibited the export of most of North Korea’s minerals, textiles, fish, and basic items such as wood products. They also began to cut into North Korea’s earnings from the export of labor to foreign countries by requiring that all workers return to North Korea in the next year and prohibiting future work contracts. In essence, the sanctions on North Korea have moved from a stage of punishment and deterrence to one of coercion.

3. The Impact of Scandal on the Chaebol Leadership

The impeachment of Park Geun-hye has also had a significant impact on the leadership of South Korea’s chaebol who became embroiled in the scandal, but also left mixed signals. When the scandal first broke there was hopes that the history of the South Korean legal system going light on the heads of chaebol would have changed. Lee Jae-yong, the head of Samsung, was found guilty of giving bribes to Choi Soon-sil in the Park scandal and now faces 12 years in prison. However, there are now indications that may not be the case. Many of the key figures of the family behind Lotte were also convicted in the scandal, but given suspended prison sentences. The Lotte case indicates that the change many hoped for may not be the case and next year we will learn whether Lee Jae-yong’s sentence is also reduced and suspended or if he is faces jailtime.

4. China’s Retaliation Over THAAD

China never formally sanctioned South Korea over the deployment of THAAD, but it took steps related to Hallyu, tourism, Lotte, and other areas in an effort to pressure the South Korean government to reverse its decision over THAAD. While there seemed to be an agreement to return to normal, China has only partially reversed its economic pressure over THAAD and indicated that it will only completely do so once the missile defense system has been reversed. However, through October, the economic costs to South Korea from the deployment of THAAD are likely over $9 billion, while North Korea has only seen its exports to China decline by $410 million.

5. The Assassination of Kim Jong-nam

While not taking place directly on the Korean Peninsula, the assassination of Kim Jong-un’s older half brother Kim Jong-nam in Malaysia was one of the year’s most surprising events. Not only did North Korea take out a potential rival to Kim Jong-un on foreign soil, but it did so using VX nerve gas raising concerns about North Korea’s potential use of chemical and biological agents in addition to its nuclear weapons and missile programs.

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

By Phil Eskeland

Yesterday, the Department of Commerce released the latest monthly trade statistics, including information related to the 3^rd Quarter services data (January through September). While most of the media and President Donald Trump focused on the near record-setting level of U.S. imports and the higher trade deficit globally, the trend with respect to South Korea runs counter to this narrative.

First, U.S. exports of merchandise goods to the Republic of Korea (ROK) continues to outpace last year’s level. For the first 10 months of this year, U.S. merchandise exports to South Korea are up 13 percent as compared to the same time period in 2016. As a result, the year-to-date (YTD) merchandise trade deficit between the U.S. and South Korea declined by 18 percent.  If present trends continue for the final two months of 2017, then the U.S. will set a record level of merchandise exports to Korea, reaching nearly $48 billion.

Second, the U.S. continues to hit repeated record level of service exports to Korea, further expanding the U.S. trade surplus in this sector. U.S. services exports to Korea have grown every quarter this year in comparison the same time periods in 2016. One reason for this expansion is the continued dramatic increase in the number of South Koreans who visit the United States, which is counted as a service export.  According to the National Travel and Tourism Office at the Department of Commerce, the number of South Koreans who visited the U.S. during the first six months of this year increased 18 percent as compared to the same time period in 2016. Between January and June, 2017, nearly 1.1 million South Koreans came to America for business or vacation purposes, making that nation now the sixth largest source of foreign visitors to the United States. In fact, 88 percent of South Korean visitors travelled to the U.S. for pleasure, making that nation the third largest source of international tourists to vacation in America. The typical South Korean traveler spent an average of $4,370 during their visit to America in 2016, resulting in a total economic impact of $8.626 billion on the U.S. economy.  As a result, the YTD 2017 (January through September) U.S. trade surplus in services to Korea continues to outpace the previous record-setting level at $7.849 billion. As a result, when both goods and services statistics are combined, it shows a dramatic 41 percent decrease in the YTD overall trade imbalance between the U.S. and South Korea.

As South Korea nears completion of its own internal process for renegotiating the Korea-U.S. Free Trade Agreement (KORUS FTA) with the United States, both sides should not let the rising U.S. trade deficit with the rest of the world influence the talks, particularly as the bilateral trade deficit between the U.S. and the ROK has significantly declined since Donald Trump became president.  Negotiators on both sides should use this opportunity to make good-faith efforts and compromises to devise appropriate modifications to update the agreement to open more markets to competition, but not to threaten to withdraw from KORUS or walk away from the talks when the predicate for that tactic (i.e., a growing U.S. trade deficit with Korea) no longer exists.

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 Kent Bacus

As President Trump wrapped up his first official visit to South Korea last week, media reports focused on geo-political tensions. From security to trade, the headlines painted a bleak picture of America’s role in the Korean Peninsula. Pundits and analysts even questioned America’s commitment to promoting long-term peace and prosperity in Asia-Pacific region. Lost in the negative press are the positive stories of cooperation between the U.S. and our South Korean partners. The beef industry provides one such example – and understanding its history in South Korea provides a unique perspective on the importance of trade to our two countries.

Less than a decade ago, the subject of U.S. beef in South Korea garnered fierce criticism. In protests that gained international media attention – including a frontpage article in the New York Times – hundreds of thousands of demonstrators took to the streets of downtown Seoul to hold a candle-light protest against U.S. beef imports. The South Korean government had just made the decision to restore market access for U.S. beef, but consumers did not trust our product’s safety and harbored concerns about bovine spongiform encephalopathy (BSE).

That was June 2008. Today, South Korea represents the second largest export market for U.S. beef. According to the U.S. Meat Export Federation, in 2016 the U.S. sold nearly $1.1 billion of U.S. beef to Korean consumers. In the first six months of 2017 our sales totaled $528 million, an increase of 21 percent year-on-year.

The eye-popping numbers are no accident. U.S. beef producers have worked tirelessly to develop trust with Korean consumers and better understand the tastes and preferences that are in demand. We have met key buyers at trade shows and heard directly from consumers at supermarket promotions across the country. The U.S. beef industry has also had the privilege of hosting visiting South Korean delegations in the U.S., showing our customers how we raise the safest, highest-quality beef in the world.

The positive impacts of these efforts are clear, but U.S. producers and Korean consumers did not do it alone. Our respective political leaders gave us a serious boost in the form of the Korea-U.S. Free Trade Agreement (KORUS). Rather than maintaining unnecessary trade barriers on beef, the U.S. and South Korean governments decided to use KORUS to tear them down.

The final result was a transformative agreement – not just for U.S. beef producers, but for Korean consumers as well. The elimination of tariffs and implementation of science-based trade standards ensures that Korean consumers can buy high-quality U.S. beef at more competitive prices. Gone are the days of 40 percent tariffs and artificial trade restrictions. Instead, we have a booming market place that allows U.S. producers to provide safe and affordable beef to South Korean families.

The aggressive pursuit of KORUS secured preferential access for U.S. beef nearly two years before our leading competitor in the Korean market, Australia, signed their own free trade agreement. As a result, U.S. beef enjoys an eight percent tariff rate advantage over the Australians. The tariff advantage, combined with rapidly-growing consumer demand for U.S. beef, enabled the U.S. to become the leading import source for beef in South Korea last year. Global retailing giant Costco, who previously sourced Australian beef for their stores in South Korea, is now importing every single ounce of their chilled beef from the United States. The move is expected to add upwards of 15,000 metric tons of fresh U.S. beef sales annually.

Thanks to these developments over the last decade, U.S. beef plays a key role in meeting the protein demands of Korean consumers. And with 12 different nutrients that fuel the human body, nutritious U.S. beef is helping children across the country grow up healthy and strong. Meanwhile, back in the U.S., increased beef exports are supporting American cattle-producing families – and the rural economies that depend on them.

To understand just how crucial exports are to U.S. beef producers, consider beef cuts like short rib and tongue. On the domestic market, these cuts fetch a lower price than traditional American favorites such as sirloin and ribeye. But in the South Korean market, the trend is reversed. Korean consumers are willing to pay a premium for short rib and tongue, allowing U.S. producers to generate additional value on cuts that would sell for lower prices at home. The additional value of exports accounts for about $300 per head of cattle; if U.S. producers sold to the domestic market alone, the additional value simply would not exist.

As U.S. beef producers continue to serve our customers in South Korea, we hope to see the KORUS success story repeated across the region. Our experience shows that strong international trade agreements and a relentless focus on meeting consumer demand are a recipe for a prosperous economic partnership. But regardless of which way the trade winds are blowing, the focus of the U.S. beef industry will remain the same. Our top priority continues to be raising the highest-quality beef for families to enjoy, whether they are in San Francisco or Seoul.

Kent Bacus is the Director of International Trade and Market Access for the National Cattleman’s Beef Association. The views expressed here are the author’s alone.

Photo from Rockin’Rita’s photostream on flickr Creative Commons.

By Hwan Kang

The renegotiation of the U.S.-Korea FTA, or KORUS FTA, was prompted by White House concerns over the bilateral trade deficit, placing sectors in which the U.S. has significant deficits in the public spotlight. However, the renegotiation of the KORUS FTA also has potential ramifications for other areas, including digital trade. Many experts recently expressed the need for the digital trade section to be updated on par with TPP articles, even though it represents “the most robust digital trade provisions in force” as stated by the Congressional Research Service. If the digital trade section is amended, Korea will likely need to open up its  e-commerce industry to foreign competitors. What would this mean for Korea?

Possible Amendments in the Digital Trade Section

There is no guarantee on where the KORUS FTA renegotiations will go, but there are some clues as to what will be addressed. For starters, in the 2017 National Trade Estimate Report on Foreign Trade Barriers (NTE), USTR mentions restrictions in cross border data movement and facilities localization as important non-tariff barriers in current digital trade with Korea, along with electronic payment systems. In terms of what the USTR has been asserting so far with digital trade in negotiations, TPP has separate articles on restricting data localization and computer source code disclosure. The administration’s recent NAFTA objectives summary also suggests that the U.S. wants trading partners not to require data and facilities localization along with disclosure of computer source code. In sum, USTR intends to update digital trade articles to prevent data localization and computer source code disclosure, which are missing in the KORUS FTA.

Currently, Korean regulations that specifically ask for data localization include installing local facilities for cloud computing services in the public sector and restrictions on exporting mapping data. More indirect forms include data privacy laws that require consent from both the government and customers to transfer financial data outside the country, practically forcing companies to store data inside the country in the process. Although the Korean government does not ask foreign companies to disclose source code in return for business, the U.S. International Trade Administration has stated the government could ask companies to submit it for “Common Criteria certification (CC certification).” CC certification is a verification process that grants security clearance for IT products that works among member countries including Korea and the United States. These are not exactly new complaints that arose suddenly after Trump administration came into power. Therefore, it would be reasonable to think USTR will try to address these problems.

Possible Changes in the Korean Market

Data localization would have broader implications than other amendments as it relates to cutting operating cost for companies in respective countries. On a positive note, this would benefit the Korean economy. According to a 2014 report by European Centre for International Political Economy, the data localization regulation had cost Korea economy 1.1% of GDP in 2014 (USD 13 billion) and 3.6% drop in FDI (USD 180 million). The reasoning behind this analysis is that the restriction on information exchange prohibited many foreign companies from functioning efficiently in Korea, which in turn hurt Korean consumers because they would not get adequate services in time. On the other hand, it would also mean that Korean companies will have more competitors. U.S. companies would not have to worry about building separate servers for Korean customers’ personal information, bringing down the cost of entering the Korean market.

To focus on more specific parts, it would eliminate the safety nets many Korean location services had. Although many data localization regulations had been enacted in the name of security against North Korea, it is undeniable that it also works as a competitive edge for domestic companies. The most controversial one would be the restriction on exporting mapping data of Korea, which blocks all the foreign services that require navigation to function properly, or at least come out much later than in other countries as was the case of Pokémon Go. If an amendment is made on this issue, U.S. service suppliers will not have to rely only on geo-spatial data provided by the government and develop location services such as autonomous cars much more freely.

Another big change would be in the online payment system. According to the 2017 NTE report, U.S. companies cannot engage in digital trade directly with Korean consumers or in Korean won unless the Korean customer has a U.S. credit card number because they could not extract the credit data without local facilities. This causes U.S. companies to rely on Korean bank or credit card companies as the middlemen in all transactions or to trade in U.S. dollars, which is also a hindrance to Korean consumers. If an amendment is to address this issue, the Korean financial sector would have to face U.S. credit card companies or banks on equal footing. Furthermore, since the U.S. provides a more convenient online payment system without Active X or a confirmation certificate, the Korean digital market would also have to consider abolishing these requirements. Though, in the long run it may make digital Korean firms more competitive internationally.

Putting the computer source code disclosure article in the FTA would also ease entering into Korean digital market for U.S. IT companies. It is not that U.S. brands cannot come into the Korean market. However, for IT products that were acquired by the government, they have had to overcome the barrier of a separate certification process by the Korean National Intelligence Service for security reasons even if they complied with CC certification. The 2017 NTE report also says that the boundaries for subjects of certification have been vague for the U.S. businesses. With an amendment in place, the Korean government would have to violate the agreement to perform a security clearance of its own on IT products if it comes to computer source codes, which bought time for fast growing domestic IT companies trying to secure a deal with the Korean government.

Challenges and Implications

Of course, these are all based on the presumption that South Korea will agree with these propositions should they be raised by the United States. There is still lingering doubt left in Korean minds about completely opening up the market in terms of digital trade, as can be seen in the case of Uber in Korea. Some people also raise security concerns specifically in relation to the data localization issue. They believe that having the electronic data within the geographical border would somehow increase the level of data security, which is a response to the fears that rose after the Snowden incident.

It might be possible that the digital chapters in the KORUS FTA will be relatively unchanged since there is so much attention on other issues. However, the KORUS FTA has been and will probably remain as a benchmark of international digital trade rules after the renegotiation. As such, it will have implications for Korea and the rest of U.S. trade partners as digital transaction becomes the core of international trade, which is all the more reason why we should keep an eye on it.

Hwan Kang is currently an Intern at the Korea Economic Institute of America as part of the Asan Academy Fellowship Program. He is also a student of Seoul National University in South Korea. The views expressed here are the author’s alone.

Photo from Jim Mattis’ photostream on flickr Creative Commons.

By Phil Eskeland

As President Donald Trump left Washington, D.C. to travel to Asia, the Department of Commerce released the latest set of trade data for the month of September.  The emphasis on boosting merchandise exports of U.S. manufactured goods and agricultural products remains a singular focus of the Trump Administration as it tries to improve the economy, particularly in the Midwest of the United States.

There continues to be good news with respect to Korea.  The bilateral merchandise trade deficit between the U.S. and Korea continues on a lower trajectory.  For the first nine months of this year, the two nation’s bilateral merchandise trade imbalance in 24 percent less as compared to the same time period last year.

One reason for this downward trend in the bilateral trade deficit is that the U.S. is on track to reach a record year in exporting merchandise goods to South Korea.  Between January and September of this year, the U.S. shipped $36.1 billion in merchandise goods to Korea – a level that has surpassed the previous record set in 2014.

On average, the U.S. has exported about $4 billion of goods to Korea during each month thus far in 2017.  If this pace continues with only three months left in the year, the U.S. could export as much $48 billion of merchandise goods to Korea in 2017, approximately $4.5 billion higher than the pre-Korea-U.S. Free Trade Agreement (KORUS FTA) level set in 2011.  Thus, the U.S. is well on its way toward fulfilling the forecast by the independent U.S. International Trade Commission (USITC) that once the KORUS FTA is fully implemented in 2022, “merchandise exports to Korea would likely increase by an estimated $9.7 billion – $10.9 billion as a result of tariff and TRQ (tariff-rate quota) provisions.”  The U.S. is nearly half-way towards this objective.

As the President and his economic team deliberate the future of the KORUS FTA with their South Korean counterparts, this new set of trade statistics from the U.S. government should inform their discussions that the agreement continues to work well.

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 Steffen Korn’s photostream on flickr Creative Commons.