US Withdrawal from KORUS Free Trade Agreement?

From Reuters:

President Donald Trump on Saturday said he would discuss the fate of a five-year-old U.S.-South Korean free trade deal with his advisers next week, in a move that could see him pull out of the accord with a key American ally at a time of heightened tensions on the Korean peninsula.

This seems to me an ill-advised action, if undertaken, even on solely economic grounds.

First, the US-Korea goods trade balance is improving:

Figure 1: US-Korea goods trade balance, 12 month moving sum, in billions of US dollars, not seasonally adjusted. Source: BEA/Census via FRED, and author’s calculations.

Second, the US-Korea goods trade balance is not really relevant macroeconomically, and hence in terms of overall output and employment.

Figure 2: US-Korea bilateral goods trade balance, n.s.a. (blue), and US net exports of goods and services (red), both as share of GDP. NBER defined recession dates shaded gray. Source: BEA/Census for US-Korea trade, BEA NIPA 2017Q2 2nd release for net exports, and author’s calculations.

This is not to argue we couldn’t have more aggregate demand redistributed to the US — in my recent paper on global imbalances I argue that in fact it would be desirable for the US to have a smaller current account deficit. But that is overall, with respect to the rest of the world. (Korea should probably have a smaller current account surplus than the 6.2% of GDP projected by the IMF back in April, but US tariffs on Korean exports are likely to have second order effects on the macro aggregates key to determining the current account.)

But, the President has stated: “I want tariffs. Bring me some tariffs!” This measure would be consistent with that policy stance.

9 thoughts on “US Withdrawal from KORUS Free Trade Agreement?

    1. OG

      Actually, Ford and GM are NOT cheering Trump on. GM is the largest US investor in Korea. It exports about 140k cars from its facilities in Korea to the US and imports a bit over 10k US made cars into Korea. Korean technology and supplier networks for smaller, more fuel efficient vehicles explains most of this, not wages.

      American business generally likes KORUS. Its real success has been in improving US exports of services to SK. The US runs a rising surplus in trade in services with Korea.

    1. Bruce Hall

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      But western business leaders and diplomats are increasingly unhappy with longstanding non-tariff barriers, which they say go against the spirit of trade deals struck with the EU in 2011 and the US in 2012.

      “We feel the spirit of the free-trade agreement is not being applied and this is a source of frustration for us,” said one western diplomat. “South Korea seems not fully convinced on free trade, thinking only exports are good and imports are bad.”

      Business leaders are calling on the administration of Mr Moon, elected last month after his predecessor’s impeachment, to push through reforms to deregulate the trade environment.

      Of particular concern is the presence of “Korea-unique standards” — the idea that Seoul requires goods to have specifications that differ from international norms.”

    2. Erik Poole

      “because China, not South Korea, is North Korea’s puppeteer.” [emphasis added]

      I cringe when I read that kind of stuff Bruce Hall. It recalls the “us and them” politics that has been driving so many extremely bad US foreign policy decisions in recent decades.

      Why the word cringe? Because I immediately imagine blow back in the form of dead Americans.

      What are you trying to say? That China has more influence over North Korean politics than South Korea does?

  1. Steven Kopits

    I believe the odds of a military conflict with North Korea are now more likely than not. I cannot see how threatening to withdraw from free trade with South Korea could be a constructive step at this point.

  2. Barkley Rosser

    To add to his astounding irresponsibility, Trump has tweeted an accusation that Presi. Moon of ROK has been engaging in “appeasement” for calling for talks with the North Koreans. Of course, that is what the Chinese are calling for along with the Russians (and pretty much everybody else), and even Trump himself has offered to talk with Kim Jong-un. Given that a new war in Korea could lead to not just thousands but even millions of dead South Koreans, this conduct on Trump’s is beyond incompetent; it is unspeakable.

  3. 2slugbaits

    This is brilliant. First President Chump kills TPP, which weakens our relationship with our key allies. Then he talks tough about killing trade with China or any country that does business with NK. (Does that include Trump businesses in Russia???) Then he blathers on about tariffs against Korean imports. Countries like Vietnam, Malaysia, Singapore, Taiwan and Japan have got to be wondering who needs enemies with a friend like the US.

  4. mike shupp

    You’re too hard on Donald Trump. I’ll bet the poor man sits at his Resolute desk weeping sadly during the empty hours when General Kelly has deprived him of playmates, mourning the fate that caused him to be born in the wrong moment of history. If he’d only been around in the 1930s and taken the Presidency away from that wanker FDR, when the 1940s got rolling he’d have been in a position to drive such tremendous deals playing the Brits and the French against the Ities and the Germans! History would have described forever as incomparable! And these days, life is just so mediocre, that aspiring to return to our national Greatness is all we can hope for.


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