The U.S.-Korea Free Trade Agreement (KORUS) has been in the news a lot recently as it reached its fifth anniversary and Vice President Pence traveled to South Korea and announced that the U.S. intends to “reform and renegotiate” the trade deal. With all this attention on KORUS, we thought this was a great chance to examine the trade deal and see how it is benefiting Washington state five years later.
Even before KORUS, South Korea was one of the largest trading partners for the United States, ranking just behind Germany and ahead of Great Britain in terms of total trade. KORUS removed 80% of tariffs as soon as it went into effect, and removed another 15% by 2014. All but a handful of the remaining 5% of tariffs will gone by 2026. This means that Korea is significantly more open for U.S. business than it was in the past.
Curiously, the U.S. trade goods deficit with Korea has doubled in the last five years to $27.7 billion. While this may seem alarming, there are several simple explanations for this. First, there was a downturn in global trade over this time period, and without KORUS U.S. exports might have been even lower. Second, Korea produces some of the most in-demand consumer products that Americans have a growing desire to buy, such as televisions, tablets, smartphones, cars and home appliances. This has more to do with American consumers’ purchasing choices than the trade agreement. In fact, the popular products that have driven up the deficit the most, such as IT products and automobiles, were not impacted by KORUS at all because their tariffs were already zero or remained unchanged by the trade deal. Finally, the large U.S. surplus in services exports ($10.7 billion with Korea) is not reflected in the trade deficit number. When services are included, the deficit shrinks considerably.
Washington state itself runs a healthy trade surplus of about $2 billion with Korea, and many of our exports to Korea have seen consistent growth thanks to KORUS. For example, Washington-grown potatoes and cherries have been in high demand in Korea, and Washington farmers have seen increases in exports as large as 80% for potato products and an astonishing 200% for cherries! In fact, Korea is the United States’ 5th largest export market for agriculture, offering considerable export opportunities for Washington’s robust agricultural sector. But the benefits are not just agricultural, and KORUS has provided a lot opportunities for all kinds of small businesses, from aerospace and medical device manufacturers to software developers.
For example, Sharpe Mixers of King Country, who employs 40 Washingtonians to build mixers for construction, pharmaceutical, mining, chemical and other applications has benefited from KORUS. The trade agreement has allowed them to bid on multimillion dollar deals in Korea and partner with several Korean engineering firms on projects in-country and around the world. Another example is the Andrew Will Winery from Yakima. Before KORUS, they only had one trade partner in Korea, but with KORUS reducing the cost and ensuring the quality of American wines, the Andrew Will Winery has been able to get a foothold in the small, but fiercely competitive Korean wine market. There is also Bellevue’s Tryline group, a small import-export business that trades in a range of high quality chemicals and chemistry tools. KORUS has lowered the tariffs on elements like titanium and bentonite to single-digit figures, which immediately allowed Tryline export high quality lab materials to Korea.
Though KORUS has made some great strides in a positive direction, it is not perfect. For example, the Korean pharmaceutical system is notoriously complicated, and it was hoped that KORUS’s focus on transparency in terms of pricing and reimbursement would demystify the Korean pharmaceutical industry. But unfortunately, South Korea has not followed through with their obligations. For instance, the South Korean government applies a pricing mechanism to new therapies that produces artificially lowprices based on the average of all similar drugs, including those that are off-patent and generic. While this may not sound like a big deal at first, this artificial cap hamstrings companies that put the money and effort into researching, testing, and developing new, often better, innovative therapies. These policies result in the Korean government undervaluing newly innovated therapies and denying access to them for patients who may benefit.
In addition, Korea sometimes gets around KORUS by setting up regulations to unfairly keep U.S. products out of the market. For example, Washington apple growers currently cannot sell apples in Korea due sanitary and phytosanitary (SPS) restrictions, or the fear that U.S. diseases or bugs will survive the trip in our apples and pears and wipe out Korean fruit trees. However, there is no evidence that this case, and it seems likely that Korean farmers are using these measures to give themselves an unfair advantage over their U.S. counterparts.
Despite some of these struggles, KORUS has overall been beneficial to both sides, allowing the U.S. to sell more manufactured products ($6.1 billion), airplanes ($5.2 billion), medical instruments ($2.9 billion) and many others products to Korea, making KORUS our second largest trade deal. Instead of seeking to renegotiate this high-standard trade deal that is beneficial to Washington state, we should commit to dialogue with our Korean partners to make sure they uphold the spirit and letter of KORUS and that trade challenges are quickly resolved.
By Jon Okun
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