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Korea-US Free Trade Agreement Turns 10

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Korea-US Free Trade Agreement Turns 10

Analyzing the impact of KORUS a decade after it came into force.

Korea-US Free Trade Agreement Turns 10
Credit: Korean Ministry of Foreign Affairs

Ten years ago this month, the United States and South Korea implemented the Korea-U.S., or KORUS, free trade agreement (FTA).  The agreement was viewed as an opportunity to address economic tensions in the relationship, expand commercial opportunities between the United States and South Korea, and deepen ties between the two allies.

When the United States and South Korea began negotiating the KORUS FTA in 2006, the expectation was that the negotiations would go quickly. It would ultimately take more than six years of negotiations, debate, and delays before the KORUS FTA would be approved and implemented by both governments. While the two sides concluded the negotiations in little over a year, the agreement faced political obstacles and domestic concerns in both countries that would slow the approval and implementation processes.

The KORUS FTA was one of three FTAs negotiated by the United States toward the end of the Bush administration, with the KORUS FTA being the most economically and strategically significant of the agreements. However, the Bush administration chose to send the Colombia FTA to Congress for passage outside of the normal consultation process, ending the prospect for the approval of free trade agreements during the rest of the Bush administration’s term.

Politics, however, was not the only obstacle to the passage of the KORUS FTA in the United States. There were domestic concerns over market access for U.S. automobile and beef exports. U.S. automotive manufacturers had persistently faced challenges in the Korean market and were concerned that the KORUS FTA did not go far enough to address their concerns, while U.S. beef producers continued to face restrictions on exports to South Korea due to an earlier case of mad cow disease in the United States.

These concerns were ultimately resolved through additional negotiations over autos that also secured the support of the UAW for the agreement, as well as a commercial agreement on beef that allowed most U.S. beef from cattle under 30 months of age to be exported to South Korea.

Opposition to the KORUS FTA, however, continued to linger in the United States as the U.S. trade deficit with South Korea grew after implementation of the agreement. In 2017, then-President Donald Trump, already critical of the trade deficit and the KORUS FTA, threatened to withdraw from the agreement before ultimately renegotiating the accord to address concerns largely related to access for U.S. automotive exports and extending the phase-out of the U.S. light truck tariff.

Opposition was not exclusive to the United States, however. South Korean farmers were concerned that larger U.S. agricultural producers would push them out of local markets. They also opposed further agricultural opening to the United States during the Trump administration’s renegotiation efforts.  The Korean Confederation of Trade Unions opposed the agreement. The then-opposition Democratic United Party threatened force to stop the vote in the National Assembly and its leadership threatened to scrap the agreement should they win the 2012 general election, all despite their party originally negotiating the agreement under the Roh administration.

Despite all of these concerns, most stakeholders in the United States and South Korea are likely satisfied with how the agreement has performed over the last 10 years.

How Has the Agreement Performed?

Full KORUS year data (March 15 to March 14 of the following year), is not yet available, but a comparison of annual trade data from the last year prior to the implementation of the KORUS FTA through 2021 shows that trade between the United States and South Korea has grown significantly over the last decade.

Total trade in goods between the United States and South Korea has increased 68 percent over the last decade, rising from $100.8 billion in 2011 to $169.1 billion last year. Over that period, both countries have seen a relatively equal amount of growth in their respective goods exports. U.S. goods exports to South Korea have grown by 64 percent over the last decade, while Korean exports to the United States increased 71 percent.

Despite the disruptions from the pandemic, trade between the United States and South Korea has continued to expand. U.S. exports to South Korea were at a pre-pandemic high of $61.9 billion in 2019, but grew to $73.2 billion last year. South Korea has seen a similar growth, with its exports to the United States increasing from $73.3 billion just prior to the pandemic to $95.9 billion last year.

There have also been changes in the patterns of trade. Prior to the KORUS FTA’s implementation, machinery and electrical parts were two the biggest categories of exports from the United States to South Korea. Energy exports, specifically exports of crude oil and LNG, have since surpassed machinery and electrical parts as the leading U.S. exports to South Korea.

While the KORUS FTA eliminated the tariff on imports of crude oil and LNG, other factors, however, likely contributed more to the surge in U.S. energy exports to South Korea. In late 2015, the United States lifted a longstanding prohibition on the export of crude oil, while it only began exporting LNG in 2016 after LNG export facilities came online. Both of these domestic shifts in the United States likely played a larger role in the growth of energy exports from about $85 million in 2011 to $18 billion last year.

The areas of concern about the agreement have shown improvement as well. The U.S. trade deficit with South Korea, which rose during the early years of the agreement, began to decline in 2016 and continued to do so until the pandemic began. By 2019, the trade deficit was slightly smaller than it was prior to KORUS coming into effect, but rose to $22.7 billion in 2021, during the pandemic.

Exports of U.S. beef and automobiles have also done well. Beef exports to South Korea have grown from $525 million to $1.1 billion last year. U.S. exports of vehicles have grown from $347 million in 2011 to $3.5 billion in 2021. In terms of the number of vehicles, U.S. exports to South Korea have grown from 8,252 vehicles in 2011 to 30,759 last year according to the Korea Automobile Importers & Distributors Association. Exports of vehicles and automotive parts are now the fifth largest export category for the United States.

While there were concerns during the initial five years of the agreement that KORUS may be having a negative impact on domestic cattle production in South Korea, the number of cattle has grown in recent years and is expected to exceed 2012 numbers this year.

If the pandemic hasn’t been an obstacle to the growth in goods trade, it has had an impact on services trade. In 2011, the United States exported $17.9 billion in services to South Korea. Those figures reached a high of $24.4 billion in 2017. However, U.S. services exports fell from $23.4 billion in 2019 to $17.9 billion in 2020, the last year data is available, most likely from the decline in travel and other services hindered by the pandemic.

Exports of South Korean services to the United States have grown more modestly, rising from $9.9 billion in 2011 to a high of $11 billion in 2019, but also declined in 2020, only reaching $9.7 billion.

Foreign Direct Investment has also grown under the KORUS FTA. According to the Bureau of Economic Analysis, U.S. investment in South Korea has grown modestly from $28.2 billion in 2011 to $33.9 billion in 2020, but South Korean investment in the United States has grown 220 percent since 2011. South Korean investment in the United States grew from $19.9 billion in 2011 to $63.7 billion in 2020.

One thing that the KORUS FTA was not successful in facilitating, however, was protecting South Korea from the Trump administration’s efforts to use the Section 232 national security process to place quotas on exports of South Korean steel to the United States.

What Comes Next?

While the KORUS FTA has benefited the United States and South Korea, new issues have arisen. When the United States and South Korea originally finished negotiating the KORUS FTA in 2007 Netflix had just begun streaming, Twitter was a year old, and Facebook was only three years old. The digital economy in the intervening years has reshaped how we consume and purchase content in ways that were not as clear at the time. The pandemic and geopolitical tensions between the United States and China have also reshaped how governments approach trade policy.

The KORUS FTA will remain the foundation of the South Korea-U.S. economic relationship, but the future will be shaped by the changes that have occurred since the agreement was originally negotiated. Whether through the Biden administration’s Indo-Pacific Economic Framework or other forms of collaboration, issues related to technology, digital trade, and climate change will shape the next decade of South Korea-U.S. economic relations.