South Korea Reaches Agreement on Steel, Aluminum, KORUS Changes
South Korea has agreed to restrict its steel exports to the U.S., reducing them by 30 percent from the last three years' average, and in exchange, the U.S. will give it a permanent exemption from the 25 percent tariff on steel that was instituted to protect the U.S. military industrial base. The steel agreement was part of a larger deal that includes changes to KORUS, the six-year-old U.S.-Korea Free Trade Agreement. South Korea's Trade Minister Kim Hyun-chong announced the agreement in principle on March 26. U.S. Treasury Secretary Stephen Mnuchin said on "Fox News Sunday" that the two countries reached an understanding, adding, "We expect to sign that agreement soon."
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Kim said that provisions in KORUS that affect South Korea's agricultural sector are unchanged, and that the U.S. is not reimposing any tariffs that had been lowered since KORUS was implemented. Critics of the KORUS agreement pointed to non-tariff barriers to auto trade in South Korea. U.S. imports of Korean cars account for 70 percent of Korea's trade surplus with the U.S. Under KORUS, any automaker could ship no more than 25,000 cars a year to Korea that do not have all of Korea's safety classifications. Now, that quota will be raised to 50,000.
This will not change the balance of trade in the next year or two, but Tony Stangarone, senior director of trade for the Korea Economic Institute, said that within five years, U.S. auto exports to Korea could grow substantially. Stangarone said that Ford sold 10,727 vehicles in South Korea in 2017 and Chrysler sold 7,284. He said Toyota does not disclose its sales figures, but that it is a larger seller, and those cars are built in the U.S., despite the fact that Japan is much closer. Korea has an 8 percent tariff on cars made in Japan, and because cargo ships going back to Asia from the U.S. tend to be pretty empty, shipping is quite cheap from the U.S. "My understanding is that Toyota has come close" to the cap, Stangarone said. Toyota's press office did not respond to a request for comment.
Stangarone said, "You’ll probably see the autos deficit slowly come down some," but that the factors most likely to narrow the trade deficit -- $10 billion last year -- are Korea buying military hardware and buying more natural gas from the United States. Under the original KORUS, Korea would have been exempted from the 25 percent tariff on imported trucks in 2021. Now, that tariff will extend until 2041. Stangarone said Hyundai had produced a concept vehicle for a small truck it was considering building for the U.S. market. Now that won't happen, but the company might consider opening a plant in the U.S. But even if that were to happen, it would be more than two or three years from now, he said.
Dan Ikenson, director of the Cato Institute's Herbert A. Stiefel Center for Trade Policy Studies, agreed, "If you announce that you’re building a tariff wall, it encourages companies to build in the United States." The classic example is Honda opening its first auto plant in the U.S. in Ohio in 1982. Many Japanese and German automakers followed over the decades. But, he said, Trump's unpredictability and views on trade would also be a deterrent to foreign investment. "Since Franklin Roosevelt, all of our presidents were committed to the concept that trade benefits all parties. Now we’ve got Trump, who’s acting on the sentiment that the United States has been taken by the world.... We’ve been poorly treated, and now we’re going to stand up for ourselves."
That means trading with us will still look risky to other countries, he said. "If the Koreans are going to be producing pickup trucks here, they’re going to want to make sure Korean parts can come in; if there are barriers to those inputs coming into the United States, that would weigh against investing in the United States," he said.
Krystal Tan, Asia Economist for Capital Economics, wrote in a research note that Korean exporters will be relieved to see the KORUS changes, because they are small. She wrote: "If KORUS had been scrapped and Korea’s share of US imports fell back from the current 3 percent to its 2.5 percent average seen in the five years before KORUS came into effect, the hit could have been the equivalent to roughly 0.5 percent of Korea’s GDP." Ikenson said the KORUS rewrite is more political than economic. "To me these are changes that are at the margins," he said.