South Korea is expecting tough trade talks ahead with the United States after President Donald Trump strongly criticized the free trade agreement between the two countries for dramatically increasing the U.S. trade deficit.

A report by the United States Trade Representative (USTR) laid out key trade objectives for the Trump administration that include “breaking down unfair trade barriers” and ensuring American businesses have a “fair opportunity to compete.” And it specifically points to South Korea, along with China and the North American Free Trade Agreement (NAFTA), as egregious examples of unbalanced and unfair trade.

The South Korea/U.S. free trade agreement (KORUS FTA) was the largest trade deal implemented during the administration of former President Barack Obama. Since it took effect in 2012, the U.S. trade deficit with South Korea has more than doubled. U.S. exports to South Korea fell by $1.2 billion, while U.S. imports from South Korea grew by more than $13 billion. “Needless to say,” the report notes, “this is not the outcome the American people expected from that agreement.”

”Those are harsh words and that is the economic and political reality that we have to deal with,” said Jeffrey Jones, an international trade attorney with the law firm Kim & Chang at a recent Korea International Trade Association forum.

Deficit vs. investment

Business leaders and some former trade officials in Seoul have voiced concern that the Trump administration is being overly critical of the KORUS FTA by putting too much emphasis on the trade deficit that is just one aspect of a complex and evolving economic relationship.

For example, Korean investment in the United States, from companies like Samsung and Hyundai, have created more than 45,000 American jobs. “Direct investments Korean companies have made in the United States since KORUS have exceeded trade deficits with Korea,” James Kim, chairman of both GM Korea and the American Chamber of Commerce, said in a recent Korea Times interview.

However Kim also said South Korea could do more to lower non-tariff related trade barriers in the auto industry, that account for 80 percent of the U.S. trade deficit, by relaxing environmental and inspection regulations.

There is also an argument to be made that the KORUS FTA helped prevent the trade deficit from getting worse, said Jones, who is also a former chairman of the American Chamber of Commerce in Korea. All foreign imports into South Korea have been in decline in recent years. U.S. imports dropped only by 2.8 percent, while Japanese imports are down 15 percent, Australian imports are down by 20 percent, and imports from the EU are down almost 10 percent.

And Jones notes that last year’s $23 billion South Korea trade deficit with the United States is small in comparison with the U.S. trade deficit with Japan that is five times higher and with China that is 10 times as large.

Broader alliance

While American business leaders in Seoul say it is important to understand the complex reasons for the current U.S. trade deficit with South Korea, former trade officials say it is also important to recognize how it took years of tough negotiations and compromises to reach such a comprehensive free trade deal.

Kim Jong-hoon, the former director of the South Korean Ministry of Foreign Affairs and Trade, who was a key trade negotiator during the KORUS talks, said his country made  major concessions.  

“Everybody knows that Korea’s tariff was much higher than those of the U.S. So when we talk about reduction, then Korea had a deeper cut, deeper, deeper cut than the U.S. did,” said Kim.

Wendy Cutler, the former USTR chief KORUS negotiator, who is now vice president of the Asia Society Policy Institute, said the trade agreement also provided a framework to resolve disputes that were undermining trust and cooperation in other areas of the U.S./South Korea alliance.

“In our bilateral relationship it was often the economic issues that were really the source of tension. And so once we were able to conclude KORUS, we found that our overall alliance became stronger,” said Cutler.

Business leaders with the American Chamber of Commerce in Korea recommend that the South Korean government agree to cooperate with the Trump administration to improve the FTA, which is now five years old and in need of upgrading.

Youmi Kim contributed to this report

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