One of Donald Trump’s favorite targets on the campaign trail were trade deals. Last fall he said, “We are killing ourselves with trade pacts.” Now as president, around his 100th day in office, he signed an executive order to review all American trade agreements. This review includes the Korea, United States Free Trade Agreement (KORUS FTA), which he once identified as, “a job-killing trade deal”.
During a visit to Seoul in April Vice President Mike Pence, in a somewhat unprecedented move, said that the administration is looking to “review and reform” this agreement. What could “review and reform” of a trade deal mean? Typically, trade deals take years to negotiate, are implemented over time, and are intended to maximize two or more countries’ comparative trade advantages. If the Trump administration decides to undertake these measures, it owes producers and consumers, the main drivers of a nation’s economy, more explanation.
One reason for these attacks on trade deals, according to the Trump administration, is because they say they hurt American workers when consumers buy products from abroad. The phrase, “Buy American,” has been a rallying cry for politicians for decades, and was used extensively in Trump’s campaign.
What does it mean to “Buy American”? Does it mean buying only products made in the United States? From American companies? Is a Hyundai Sonata car built with American tools and by American workers not American? What about a Hollywood movie co-produced by a Chinese studio? Globalization has certainly eroded the meaning of that phrase because a final product in one country can contain multiple parts produced around the world.
As for the KORUS FTA, which turned 5 years old this spring, the Trump administration has not been clear on what needs to be changed, nor why it is considered too favorable to South Korea. On April 28, Trump once again lambasted the deal in an interview with Reuters, but only stating that the deal is a “one way street” and that the United States “may terminate it”.
Is it true that the deal has been a boon only to South Korea, and that they played the American negotiators for suckers? Not according to the United States Chamber of Commerce, stating that while there is a trade deficit in favor of Seoul, it would be much higher without KORUS FTA, it would be much higher because South Korea’s trade deals with other nations would make U.S. products less competitive in the South Korean market.
Due to the lack of specifics in the administration’s statements, one can only speculate as to which sectors of American industry have been supposedly damaged by this particular FTA. John Brinkley, an American trade specialist who worked on implementing the deal, responded to Vice President Pence’s call to reform, saying that there is nothing to reform for several reasons.
Firstly, Korea has agreed to eliminate 95% of its tariffs within three years, and the remaining 5% will be gone after 15 years of the deal’s implementation. Secondly, certain aspects of Korea’s manufacturing sector, like appliances and electronics, are some of the most popular consumer products in the world. Finally, Korean direct investment in the United States has increased 1,654% (the latest available data). Due to the variety of products traded between the two nations, free trade has not caused massive manufacturing job losses in the United States because South Korea does not have a relatively cheap labor force for American companies to outsource to. And finally, such trade deficits are not signs of sinister intent between two nations.
To look at each reason more closely, the elimination of tariffs is seen as an important step to get the most from trade, and South Korea has complied. While there have been no mention of new tariffs from the United States regarding this particular deal, President Trump has mentioned them before, mostly in the form of a border tax. But targeting foreign imports is clearly misplaced retaliation. Not only do millions of jobs depend on exports, lessening competition through barriers to entry drive market prices up, not down, and those in the middle class are hurt the most by these practices.
No matter how many restrictions a government attempts, consumer taste cannot be completely regulated. Certain South Korean brands, like Samsung, LG, Hyundai, and Kia, will be preferred by some consumers no matter what. These same companies also all have large production facilities in the United States, employing thousands of American workers. While it is true that manufacturing workers in wealthy nations around the globe have fretted about losing their jobs to countries where labor is less expensive, this is not the case between the United States and South Korea, where both workforces enjoy relatively high wages.
Politically, it is difficult to determine where the KORUS FTA fits on the spectrum of Trump’s economic strategy. His overall approval ratings are historically low, but his numbers among his base are still very high. Despite making bold campaign promises like, renegotiating NAFTA, taking a tough stance on China, and building a border wall with Mexico, very little progress has been made towards achieving these goals. It is possible that the administration views the KORUS FTA as a battle it can win. It is also possible that this kind of rhetoric is intended to be a bargaining tool. He may initially ask for big concessions in hopes of reaching a deal somewhere in the middle. Afterall, he did claim he would run America like a business.
It is not unreasonable for an administration to want to improve on trade agreements in order to maximize benefits for their respective countries. This is why such agreements are constantly monitored and reviewed. But so far, this administration is ignoring the simple fact that while trade makes countries better off, it cannot bring 100% satisfaction to all members. Such is the spirit and definition of compromise.
The United States is not the only country seeking to improve its citizens’ lives, and it must cooperate with other governments, even if that means the occasional concession. The Trump administration needs to express clearly its goals for economic growth and trade, and acknowledge the bigger picture when criticizing free trade agreements.
These deals are carefully crafted over years, and businesses devote many resources to comply with them. If free trade is the enemy, it takes more than simply labeling it as ‘unfair’ to justify drastic measures. Problems must be dealt with, but they must at least be identified first.