ⓒ YONHAP News

South Korea and the United States announced changes to the Korea-US Free Trade Agreement on September 3rd, local time. The 6-year-old deal has been heavily criticized by US president Donald Trump, who said the KORUS FTA, as it’s better known, of enlarging US trade deficits. As recently as September 2017, the White House had prepared documents to withdraw from the deal entirely, over heavy protest from many in Trump’s Cabinet, including Chief Economic Advisor Gary Cohn. Seoul and Washington have held 3 rounds of negotiations after Trump took office, and in March agreed to revisions in principal. We’ll take a close look at the revised KORUS FTA with Professor Kim Hyung-joo of the LG Economic Research Institute. 

President Trump openly and frequently expressed disapproval of KORUS FTA ever since he was campaigning for presidential election. He claimed that the deal resulted in a large trade imbalance in the auto-sector. In other words, he accused KORUS FTA of widening the auto trade deficit for the US. So the revisions to the deal include measures to alleviate such concerns. Another notable change is the edits to the investor-state dispute settlement (ISDS) clause. There had been complaints from the Korean side that the arbitration process under the current ISDS provisions tends to be extremely favorable for US investors. In response, the two sides added clauses to clarify the arbitration system, with hopes to avoid any unnecessary lawsuits. 

The latest revisions to the KORUS FTA indicate that the Korean government opted to protect its agricultural and steel industries, while making some concessions in the automobile sector. Meanwhile, amendments made to the ISDS (Investor-State Dispute Settlement) clause, long derided in Korea, are seen as a productive achievement. 

American and other international companies have abused the KORUS FTA or the Korea-EU FTA and taken unnecessary legal actions against the Korean government in the past. With the latest revision, such potential abuse of the arbitration system can be prevented. More specifically, an investor who attempts to settle a dispute through one free trade agreement and loses, will not be able to raise the issue up again through another FTA. Also under the revision, the company that files the lawsuit must provide proof of damage, while the current provisions require the Korean government to prove that it is not responsible. This change is expected to prevent companies from filing impetuous lawsuits, and help the Korean government structure its economic policies.        

In May, US activist fund Elliott Associates launched a legal dispute with South Korea worth over 800-billion won. The hedge fund demanded compensation from the government for losses and damages it claims to have suffered regarding the merger of Samsung C&T and Cheil Industries in 2015, accusing the government of wrongfully intervening in the process. The move was based on the ISDS clauses of the KORUS FTA. As the clause allows American investors who claim to have suffered damages due to the Korean government’s policies to demand compensation through international arbitration agencies, concerns of infringement of judicial sovereignty and excessive litigation have been raised in Korea. However, with the latest revision to the FTA, such abuse of ISDS is expected to be prevented. Meanwhile, partial damage is expected in the South Korean auto sector.    

The latest revisions are unlikely to have a big impact on Korea’s auto exports. While some Korean carmakers are said to be developing pickup trucks, it has yet to reach the commercialization stage. The agreement to expand the unit threshold for imports of American cars that do not have to comply with domestic industry regulations to 50,000, on the other hand, may have a bigger impact. Lately the number of foreign vehicles in Korea has increased greatly. In particular, we’re seeing more imported SUVs on the road. The majority of SUVs, including those by European or Japanese carmakers, are manufactured in the US, and they will all benefit from the new import regulations. At the current rate, the 50,000 limit will be reached quickly, taking more shares in the domestic market away from Korean carmakers.   

The US aggressively argued for revising language in KORUS FTA related to the auto sector. Under the revised deal, the US will extend by another 20 years a tariff on imports of Korean pickup trucks, which was expected to be scrapped as of January 1, 2021. The import threshold of US vehicles that meet US safety standards in lieu of Korean standards will be expanded to 50,000 units as well. Currently, the top 3 carmakers in the US export around 19,000 units to Korea. The revised FTA will make it easier for American carmakers such as GM to expand their exports to Korea. However, benefits of the revised KORUSFTA may be largely dampened by on-going renegotiations of the North American Free Trade Agreement, or NAFTA, between the US, Mexico, and possibly Canada. Autos are a big part of trade between the three countries, and concerns remain regarding Washington’s moves to exert a 25% tariff on Korean cars under the Trade Expansion Act 232.

Although the US has agreed to the FTA revision, it is still possible for Washington to further abuse the Trade Expansion Act 232. From the US point of view, Section 232 of the Trade Expansion Act deals with national security, superseding international laws. The act gives the President of the United States authority to adjust the imports of goods or materials from other countries when national security is deemed impaired or threatened by imports, a method approved by the World Trade Organization. Unlike other sections of the act, Section 232 deals with particular products, such as steel, aluminum, and automobiles. This means that revisions to the FTA are unlikely to fully abet Korea’s concerns.

In this era of Trumpian protectionism, it is simply unknowable whether or not Washington would exempt Korean autos from a 25% tariff. Variables continue to increase as the US is also renegotiating its trade deals with the European Union and NAFTA. While South Korea appears to have dodged a bullet by proactively revising its trade deal with the US before others, much depends on Washington’s future decision on the Trade Expansion Act 232. For this reason, the Korean government is making diplomatic efforts to make sure that Korean autos are exempted from the list of 25% duties, while at the same time attempting to speed up the enactment of the revisions made to the KORUS FTA. 

The process differs in the two countries. In the US, the publication of the text of the agreed outcomes followed the completion of US domestic consultation procedures. In Korea, on the other hand, the Ministry of Trade, Industry and Energy has published the text and all other related documents on a website to collect public opinion until September 10. The ministry will also review whether the texts have been translated without error, and also check to see if any of the clauses clash with local laws. When everything is deemed error-free, either the Trade Ministers or the Presidents of both countries will sign the deal. After all the administrative processes, the revisions are expected to go into effect starting January 1, 2019. 

President Trump has already mentioned that the revised KORUS FTA may be signed during the United Nations General Assembly, slated to open on September 18, and the Korean government also aims to have the revisions go into effect next year. All eyes are now on how the two states will improve their bilateral trade conditions and balance the benefits within the newly framed trade environment.