The US-South Korea alliance has been one of the most dramatic geopolitical success stories of the post-war years. But US President Donald Trump now seems determined to do away with the economic and strategic benefits of that longstanding relationship.
In the 1950s, a war-ravaged South Korea had Asia's third-lowest per capita income, highest inflation, and slowest rate of growth. But the authorities implemented far-reaching reforms in the early 1960s, and, over the next three decades, it became an industrial powerhouse with a standard of living that qualified it for membership in the OECD, the club of rich countries. Much of this success was due to a shift from foreign-aid dependency to export-led growth.
In the mid-2000s, South Korea and the United States began exploring closer trade ties, and in March 2012, the Korean-United States Free Trade Agreement entered into force. By most measures, the KORUS has been a success. Yet, after taking office, Trump denounced it as a “horrible deal,” and insisted that it be renegotiated.
More recently, Trump announced import tariffs of 25 percent on steel and 10 percent on aluminium, and indicated that exemptions would be granted to US trade partners on a case-by-case basis. Putting aside Trump's additional announcements of trade actions targeting China, tariffs on steel and aluminium would undoubtedly have negative effects on the US economy. A few US steel and aluminium jobs might be saved, but far more would be lost in industries using those metals as inputs, which employ ten times more workers.
The Trump administration's stated objective in pursuing protectionist policies is to reduce the US trade deficit. But a current-account deficit (the trade deficit plus the services balance) reflects the difference between saving and investment. Thus, reducing it would require macroeconomic policies to reduce domestic expenditures and increase domestic savings. Protectionism won't help with that.
A few weeks after unveiling the tariffs, the Trump administration announced that it had “renegotiated” the KORUS. In exchange for an exemption from the tariffs, South Korea agreed to reduce its steel exports to the US to 70 percent of 2015-17 levels, postpone a phase-out of the 25 percent US tariff on small trucks for 20 years (from 2021), and increase its annual limit on US-made automobile imports from 25,000 to 50,000.
The second and third items are essentially irrelevant. South Korea does not currently export small trucks to the US. In fact, imported cars represent just 15 percent of domestic car sales, with US imports amounting to just one percent. This is largely because South Koreans simply don't choose American cars.
Still, it is clear that the South Koreans were forced to accede to these changes, even though they negotiated the KORUS in good faith and have stuck to its terms. Trump's “renegotiation” gave South Korea a non-choice between limiting its annual steel exports to the US and facing a punishing 25 percent tariff on all of its steel exports.
As for the US, the KORUS revisions mean that foreign exporters of goods made with steel will gain a competitive advantage over domestic producers, who will have to pay more for their steel. As a result, some US producers will move overseas, others will raise prices and lose market share, and still others will simply go out of business. These are all losses for America.
Moreover, both countries will face the additional bureaucratic burden of managing their steel trade. The South Korean government will need to allocate quotas among its steel producers; and US customs officials will have to check all steel imports from South Korea to ensure that they are within the 70 percent limit and were not trans-shipped.
US customs officials will also have to inspect all other shipments from other countries to determine which are exempt and which are subject to the 25 percent tariff. According to The Economist, the Trump administration expects to spend 24,000 worker hours processing 4,500 exemption requests. And that does not even include the paperwork necessary for determining the origin and exemption status of each shipment to the US indefinitely into the future.
This is precisely the kind of managed and discriminatory trade arrangement that the US did so much to eliminate over the past half-century. But Trump has not just struck a blow against open multilateral trade. Worse, he has also destroyed America's negotiating credibility. If a US president can so easily force one-sided amendments to settled agreements, why should any country bother negotiating with the US?
South Korean leaders spent a lot of domestic political capital negotiating the KORUS, and they were willing to do that because they trusted the US to act in good faith. They now find themselves having agreed to a contract in which the other party forced them to accept terms that were never negotiated.
For US steel-exporting allies like South Korea and Japan, the fact that the Trump administration is justifying its tariffs in the name of “national security” adds insult to injury. After all, the Trump administration recently declared North Korea to be America's top strategic threat, and it is now working with the South Korean government to hold a summit with North Korea's leader this May.
If Trump really does care about national security or US competitiveness, then his actions are utterly incomprehensible. They will lead to severe costs for the US economy and the rules-based multilateral trade system, and to the loss of US credibility long after he is gone.
Anne O Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and Senior Fellow at the Center for International Development, Stanford University.
Copyright: Project Syndicate, 2018.
(Exclusive to The Daily Star)