By Jeff Ferry, CPA Research Director
A major reason the US Congress and Obama administration approved the KORUS free trade agreement with South Korea in 2011 was the expected benefits to US agricultural exports.
Six years later, it’s now clear those benefits have not materialized. US agricultural exports to South Korea have fallen 9% since 2011, coming in at $6.9 billion last year. To add insult to injury, South Korean agricultural exports to the US have surged under KORUS, up 62% to $748 million last year. It’s all part of the larger picture of a trade agreement that has been a dismal disappointment for the US economy (and a big success for the Korean economy). Our trade deficit with Korea has doubled in just five years, reaching $27 billion last year. This disappointing result makes it clear that our trade agreement with Korea must be fundamentally revised or discarded. Below we offer some suggestions on how it could be revised to deliver positive results for the US.
Our largest agricultural export to South Korea has traditionally been corn. Yet since the advent of KORUS, US corn exports to Korea have fallen 52%, reaching $870 million last year, just 13% of all our agricultural exports to Korea. Pork and pork products have also fallen, by 27% to $360 million. Poultry exports have cratered by 86%, to just $19 million last year. On the positive side of the ledger, beef and beef products have risen substantially, up 56% to $1.06 billion, while fruit and vegetable exports have risen 42% to $672 million.
Corn is the biggest disappointment of KORUS. Corn prices have declined for years, due to five big worldwide harvests in a row, from 2013 through to this year. In addition, large and growing harvests from other nations, including Brazil, Argentina, and even Thailand and Mexico, are making the market more competitive, depressing prices and reducing US market share.
But Korean domestic policies have also played a role. In the 1950s, South Korea was one of the world’s poorest countries, a near-subsistence agrarian victim of Japanese colonialism. Today it is one of the world’s more affluent nations, with GDP per head of $27,633, ranking it ahead of Spain and Saudi Arabia. It’s likely to surpass many other mid-sized nations soon and, as we pointed out in July, there is every chance Korean GDP per head will surpass the US in 14 years. The Korean economic miracle was achieved with strong state support for exports and restrictions on imports. Those policies are still in effect. For the Korean government, KORUS was simply another opportunity to further the success of their export-led growth model. Korea has run a trade surplus every year since 1998, finishing up last year with a surplus of $102.8 billion (7.3% of GDP). In the agricultural sector, Korea keeps a tight control over its export and import markets. Earlier this year, the government approved a fivefold increase in the use of domestic rice stocks as feed, up to 500,000 tons, which helps to hold down corn imports.
Another policy issue in South Korea last year was bird flu. After an outbreak of bird flu, the government banned US imports of poultry and egg products in March 2016. The ban was rescinded in August, but the effect was to decimate our exports of poultry to Korea.
Still another example of Korean policy unfavorable to US exporters is the tariff schedule on beef. Many Americans assume that a “free trade agreement” means just that: free trade, with no tariffs. In fact, while US negotiators are always keen to cut our already-low tariffs to zero wherever they can, foreign negotiators play a cagier game. So Korean tariffs on US beef imports are today at 24%. That’s better than the pre-KORUS level, but it is still a significant inhibitor on US sales into that market.
Korean tariffs are compounded by Korea’s value added tax (VAT), which is 10% and applied to all imports (on top of any tariff). On top of that, Korea has an excise tax, levied on certain luxury goods. Compare that to US rules on imports for, say, autos. In KORUS, we cut our tariff on Korean auto imports from 2.5% to zero. We do not have a national consumption tax. So it’s no wonder that sales of Korean autos in the US market have soared.
All these Korean policies aimed at furthering Korea’s export surplus expose the fundamental flaw of KORUS: the US government views trade agreements as foreign policy tools and seeks to open our market to build better political relationships, while many of our trading counterparties view the agreements as opportunities to further the growth of their economies. US farmers, workers, and manufacturing business owners pay the price for this excessive emphasis on foreign policy.
The solution is to renegotiate KORUS with a clear focus on our own economy, which is ailing, and not just in agriculture. We should not demand that South Korea buy more of any specific product. Instead, we should set out a goal of eliminating that $27 billion bilateral trade deficit over say five years. That would put the onus on the Korean government to develop a strategy to buy more American products of their choice. We expect that their solution would be to increase their purchases of US agricultural and industrial products. The US has the most desirable consumer market in the world. If South Korea wants to keep selling cars, washing machines and its other exports here, it needs to find ways to boost its US imports. Note that such an agreement would have no bearing on our political and security cooperation. The US and South Korea share common defense interests and must remain close allies.
Free trade economists often argue that bilateral deficits need not be zero between every pair of countries. As a general statement, that’s valid. But South Korea has a five-decade record of using unfair trade practices to support its own exports. The pretense that the US can negotiate a truly free trade agreement with such a country is ridiculous. So if there is to be any trade agreement, it should be one that provides the South Korean government with incentives to support US exports as the price for free entry into the US market. If South Korea won’t agree to such an evenhanded approach, then we are better off without a trade agreement.