South Korea, US Clinch Agreement in Principle to Update KORUS Trade Pact

29 March 2018

Seoul and Washington have reached an agreement “in principle” that would revise the Korea-US Free Trade Agreement (KORUS), South Korea’s trade ministry confirmed this week. The tentative agreement reportedly includes concessions from the Asian country on trade in automobiles and establishes a quota on Korean steel exports bound for the United States. 

South Korea will be the first country to be granted an indefinite exemption from the metal tariffs levied by the US under Section 232 of its Trade Expansion Act, which entered into force on Friday 23 March. (See Bridges Weekly, 8 March 2018 and related story in this edition). 

In lieu of the 25 percent tariff on imported steel, the partners negotiated a quota to limit Korean steel exports to the United States to 2.68 million tonnes per year, which officials say amounts to approximately 70 percent of the average of US-bound exports over the last three years. 

"We welcome the results of negotiations on the Korea-US FTA and steel tariffs," said Yoon Young-chan, senior presidential press secretary, according to comments reported by Yonhap. 

"We express our respect to our negotiating team for their perfect win-win negotiations," he continued, adding that the agreement served to solidify “the foundation of Korea-US cooperation.” 

Korean Trade Minister Kim Hyun-chong told reporters on Monday 26 March that the result would effectively resolve issues that had been sources of significant uncertainty for his country, referring to the reprieve from US steel tariffs and the KORUS amendments. 

"Although there are some technical issues that need to be addressed at a working level, I believe they will be settled shortly," he added. The revised agreement will need to be formally signed and ratified by the domestic legislatures of both countries before it takes effect. 

Citing concerns over its trade deficit with Seoul, Washington requested talks to amend the deal last year. Two special sessions of a “joint committee” under the FTA were held in August and October 2017. Officials have since engaged in three formal negotiating rounds since January. (See Bridges Weekly, 22 March 2018

Addressing trade deficits with major partners and updating existing trade deals has been one of the top priorities of the current US administration, which has warned that it would consider terminating deals such as KORUS unless it sees sufficient changes to address Washington’s concerns. 

"We're going to have a wonderful deal with a wonderful ally,” US President Donald Trump said at a White House press conference on Friday 23 March, hinting that a KORUS update was imminent. “It was a deal that was causing a lot of problems for our country in terms of employment and in terms of lots of other things." 

The US is South Korea's second-largest trading partner after China, with two-way trade reaching US$119.3 billion in 2017. The KORUS FTA has been in force since March 2012. 

Revised deal

Under the terms of the draft agreement, the US was able to secure improved market access and eased import restrictions for automobiles. In 2016, the US deficit in the sector alone was US$24 billion – nearly 90 percent of the total goods deficit, according to a USTR statement from October 2017. 

The deal will allow US automakers to export 50,000 vehicles that do not comply with domestic safety regulations per manufacturer each year to Korea – double the figure previously agreed under KORUS. These vehicles do meet US safety standards and would be treated as such. Kim said that he expected minimal impacts on the import volume from this concession, given that the existing threshold has not been met for six years and Ford and General Motors shipped less than 10,000 units apiece to Korea under the allowance last year. 

Many US auto companies have found the Korean market challenging to break into, where American vehicles comprise 6.8 percent of all imported cars sold in the country according to Yonhap, citing data from the Korea Automobile Importers and Distributors Association. 

The US further extended its 25 percent duty on Korean pick-up trucks until 2041, 20 years later than permitted under the deal’s previous timeframe, according to the Korean Ministry of Trade, Industry and Energy

"We reached an agreement by accepting some of the US demands in regard to market access," Kim said. "We took consideration of the fact that no companies are currently exporting domestically-produced pickup trucks to the US.” 

Korean negotiators were able to avoid higher content requirements for US auto parts, officials say. 

Rules of origin for cars has been a key topic for the US in its more recent trade negotiations. For example, Washington has proposed setting higher regional and domestic content thresholds for cars in order to qualify for preferential treatment in the negotiations to modernise the North American Free Trade Agreement (NAFTA) with Mexico and Canada. 

Seoul and Washington also agreed to hold additional talks to amend South Korea’s pharmaceutical pricing system. Meanwhile, no new concessions were made in terms of opening up Korea’s agriculture markets, designated by Seoul as a non-starter given the challenges its farm sector already faces in response to foreign competition. American agricultural exports to Korea amounted to US$6.2 billion in 2016, representing the US’ fifth largest agricultural export market. 

In return, the US has reportedly agreed to introduce a new clause aimed at instituting additional improvements to investor-state dispute settlement (ISDS), a priority for Seoul. Korean officials say that the changes would help prevent potential abuse of the international arbitration system by multinational companies and better safeguard the right to regulate in the public interest. Other changes also include amendments to certain KORUS provisions involving trade remedy investigations, another area of interest for South Korea. 

In addition, a side agreement on currency and greater transparency in exchange rate policy is reportedly expected within the coming days, according to multiple media reports. The planned accord would not fall within the scope of KORUS’ dispute settlement rules. 

Steel quota 

Korean steel entering the US will be capped in exchange for exclusion from the American steel tariffs. South Korea shipped 3.6 million tonnes of steel products to the US last year, making it the third largest steel exporter behind Canada and Brazil. Korea is also the world’s top importer of steel from China, fuelling concerns that US industry could be adversely affected through “transhipping” Chinese steel. 

Six other trade partners have been excluded from the metal tariffs on a temporary basis until 1 May, including the US’ NAFTA partners, Brazil, Argentina, Australia, and the European Union. They have been asked to negotiate a long-term response to the US’ concerns in order to avoid the tariffs for a longer period. The unilateral trade measures have drawn intense pushback from the wider trading community, both for their commercial implications for a major sector as well as the potential systemic impact for the multilateral trading system. (See related story, this edition) 

“This resolved the instability and the unpredictability faced by exporting companies,” Kim said of the steel agreement. 

ICTSD reporting; “Cheong Wa Dae welcomes S. Korea’s exemption from U.S. steel tariffs,” YONHAP, 26 March 2018; “S. Korea further opens auto market in return for U.S. steel tariff exemption,” YONHAP, 26 March 2018; “Speedy KORUS FTA deal eases trade uncertainties for now,” YONHAP, 26 March 2018; “U.S., South Korea reach revised FTA,” ASSOCIATED PRESS, 26 March 2018; “Korea, US reach agreement on FTA revision, steel tariffs in principle,” THE KOREA TIMES, 27 March 2018; “Korea evades steel tariffs, wins quota from US in quick FTA tweak,” ASIA TIMES, 26 March 2018; “US and South Korea near side agreement on currency,” FINANCIAL TIMES, 28 March 2018; “Korea agrees to import more US cars,” KOREA TIMES, 26 March 2018.

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