ArrowArtboardCreated with Sketch.Title ChevronCrossEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailMenu BurgerPositive ArrowIcon PrintIcon SearchSite TitleTitle ChevronIcon Twitter
International relations

America's tough talk pays off in South Korean trade pact

Ban on currency interventions could set precedent for other US deals

U.S. President Donald Trump, left, and South Korean President Moon Jae-in.   © Trump photo by Reuters, Moon photo by Kyodo

WASHINGTON/SEOUL -- A revamped U.S.-South Korea trade pact is the first major deal to result from President Donald Trump's diplomatic hardball strategy, suggesting that America will pursue more agreements on matters such as currency that previous administrations have avoided.

The revised free trade agreement, concluded after just three months of negotiations, is a historic win for the U.S. on trade policy, a senior White House official said. In a joint statement, U.S. Trade Representative Robert Lighthizer and South Korean Trade Minister Kim Hyun-chong said it marks "important progress in improving U.S.-Korea trade and economic relations, based on their strong and enduring security relationship."

South Korea and the U.S. signed their first free trade agreement in 2012. But the trade imbalance between them has widened substantially in South Korea's favor since then, rising 70% above the 2011 level to $22.9 billion in 2017. Trump has demanded action to shrink U.S. trade deficits with a wide range of partners.

The renegotiated pact is likely to do little to correct that imbalance. But the U.S. has nevertheless won flashy concessions in fields such as autos, an industry one senior American official said accounts for 80% of the trade deficit with South Korea. Seoul has agreed to double its annual import quota for autos that can be sold under American safety standards, rather than under South Korean standards. The deadline for the U.S. to scrap tariffs on South Korean pickup trucks has been postponed to 2041 from 2021.

The U.S. has also convinced South Korea to accept a side deal banning currency market interventions that would weaken the won -- the first agreement of its kind that America has negotiated.

Vehicles from Hyundai Motor and sister company Kia Motors at a shipping yard at a port in Pyeongtaek, South Korea.   © Reuters

As these results suggest, Washington set the agenda throughout the negotiating process. Trump himself waded into the fray at a fundraiser on March 14, the day before the third round of talks took place.

"We have a very big trade deficit with them, and we protect them," Trump told his audience in the state of Missouri. "We have right now 32,000 soldiers on the border between North and South Korea. Let's see what happens."

Less than a week before, on March 8, Trump accepted Kim Jong Un's invitation for a summit, giving the North Korean leader an opportunity to push the U.S. to reduce its military presence on the Korean Peninsula or withdraw entirely. Also on March 8, the president formally announced tariffs on steel and aluminum, citing national security concerns linked to an overreliance on imports. While his administration carved out exceptions for some nations, South Korean steel was to incur the full 25% levy, giving American negotiators additional leverage going into the final phase of talks.

This leverage came to bear when the question of a currency clause was still on the table. The U.S. Treasury Department estimates that South Korea's government sold $4.9 billion in won into currency markets between July 2016 and June 2017 to weaken its currency, though Seoul does not make such figures public. American automakers have urged the Trump administration to push for a ban on such interventions to curb the influx of low-priced South Korean cars.

The Trump administration had made clear that it would exempt South Korea from the steel tariffs if Seoul cooperated to renegotiate the trade pact quickly. On Monday, Seoul declared a revamped trade agreement had been reached. A day later, Washington revealed that a separate currency agreement was under discussion as well. Though the final details are still being hammered out, that pact will prohibit competitive currency devaluations meant to promote South Korean exports, and includes "strong commitments on transparency and accountability" related to currency policy, according to the trade representative's office.

The U.S. has labeled trading partners as currency manipulators based on analysis of their currency policies, which could make them a target of economic sanctions. But this requires strict standards to be met, and the U.S. cannot demand that the matter be corrected immediately. On the other hand, a currency agreement with South Korea -- while still being ironed out -- could make it easier for Washington to seek remedial action on exchange rates and trade deficits.

As a country that relies heavily on exports, South Korea has intervened in the foreign exchange market to keep the won weak, but a currency pact could make such steps harder to take. Although discussions between monetary authorities are the norm for resolving currency matters, a bilateral currency deal could undermine global economic institutions like the International Monetary Fund.

The current administration does not share those concerns. The agreement with South Korea suggests Washington will demand similar conditions in pacts with other nations. The U.S. under Trump has already floated the idea of a currency clause as it renegotiates the North American Free Trade Agreement with Canada and Mexico. Such provisions would give the U.S. an opening to contest other nations' trade policies at will, and could even weigh on monetary policy: Japan's aggressive monetary easing, for example, has already drawn criticism from U.S. and European officials as a form of yen manipulation.

To be sure, the new trade pact will give the Trump administration something to show for its first years in office as this fall's midterm congressional elections draw closer. Scott Paul, president of the Alliance for American Manufacturing, praised the deal Tuesday as "an encouraging sign that the administration's trade strategy is achieving results." Trump's approval rating logged an 11-month high of 42% in a CNN poll conducted last Thursday through Sunday.

Reception of the deal is a good deal cooler in South Korea. The country "seems to have been forced to swallow the currency agreement to beat back the Americans' strong demands on autos and steel," said Ahn Duk-geun, professor of international trade law at Seoul National University.

The won strengthened slightly against the dollar in Seoul on Wednesday. "If our currency policy is restricted, exports could feel the impact," said Kim Jung-sik, professor of economics at Yonsei University.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Get Unlimited access

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends January 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media