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The Art of the Korea-U.S. Trade Deal

Tue, 04/10/2018

Making Sense of President Trump's Latest Gambit

By Joshua Gardner, Vice President, North American Lead, Global Energy Practice 

Is it possible that President Donald Trump is winning on trade?

Setting aside the specifics of the Korea-U.S. Free Trade Agreement (KORUS) – which the Trump Administration and the Republic of Korea Ministry of Trade, Industry and Energy agreed to modify after only six months of negotiations – it’s fair to wonder if Trump’s strategy is working. 

Whether you agree with the deal – or with the President’s approach – what is unquestionably true is that Trump won the stare-down. He waved the threat of punitive trade tariffs as a bargaining chip to force pro-America concessions from our trading partners. He employed the bare-knuckle tactics borne of his real estate background, exploiting any and all leverage he had; in this case, using Korea’s dependence on the United States for its ultimate security to pressure Seoul into making concessions on trade. 

And it seems to have worked: the nation that made concessions here was Korea, not the U.S. Even The New York Times – among the President’s harshest critics, as well as his favorite punching bag – begrudgingly conceded that the deal “represents the type of one-on-one agreement that Mr. Trump says makes the best sense for American companies and workers.” 

Can President Trump’s actions and bluster about tariffs actually persuade other countries to open their markets to American goods and services — while doing little or nothing to damage the flow of goods and services across international borders?

Some of his staunchest supporters assert that the President has just been misunderstood, that “the elites” in Washington, D.C., New York, London, and Brussels can't decipher the subtext of the President’s words and are ill-equipped to comment on his successes. That may be true, but we’re going to try anyway.  

Understanding the Deal

Viewed broadly, this new deal is not significantly different from the old one, and is more accurately characterized as a slight modification, rather than a true renegotiation. 

South Korean exporters are relieved that none of the U.S. tariffs lifted under the original agreement have been reinstated. In addition, the modified deal fails to address critical sectors of ongoing disagreement, notably on agricultural issues. As former Assistant U.S. Trade Representative for Japan, Korea & APEC Bruce Hirsch said, “Is this as grand a deal as people initially thought it might be? No.”

These negotiations lasted only a few months, far shorter than U.S. trade talks typically take. This outcome suggests U.S. trading partners remain unwilling to give in unilaterally under pressure in the face of new protectionist U.S. tariffs by giving up major concessions, but will negotiate smaller changes on the margins of existing agreements. In addition, striking a deal quickly has the advantage of removing a potentially divisive issue between the two military allies at a time of tensions and delicate talks with North Korea. South Korean President Moon has already announced his intention to hold an historic Inter-Korean Summit with Kim Jong-Un at the end of April, and appears to be prioritizing national security and the overall health of the U.S.-Korea Alliance. 

What’s in the Deal? 

In exchange for a permanent exemption to the new U.S. 25% global steel tariffs, South Korea has agreed to the following five provisions:

  • An additional 10-year protectionist tariff on U.S. imports of Korean light trucks
  • A doubling of the total number of U.S. cars that can enter the Korean market
  • Harmonized testing and labeling standards, streamlined customs verifications, & small fair-treatment gains for pharmaceuticals
  • A non-enforceable promise by Korea to refrain from currency manipulation
  • An agreement by Korea to voluntarily lower exports of Korean steel to the U.S. by 30%

The modified deal is unlikely to do much to help President Trump achieve his goal of reversing the trade deficit between the two countries. 

Key Lessons

This is a dangerous game President Trump is playing. The deal is outsized by the level of market instability the recent escalating trade rhetoric has caused.   

In the long-term, he risks upending three decades of progress in opening markets for international trade that have benefited the citizens of the world in lower prices for nearly everything.  

History should not be ignored. His recent escalation with China over trade imbalances may risk a 1930s-style trade tariff war that shut down global trade and cratered the world in depression. If that happens, the President’s trade strategy will have clearly backfired.

In the short-term, he has fulfilled one of his key campaign promises: to renegotiate trade deals to better serve the United States. But he has shown his cards with respect to his negotiation tactics. We can now better discern how he intends to operate going forward. Here are three key lessons: 

1. “What Happens in Korea Won’t Stay in Korea.”
The President’s disdain for “awful trade deals” is not limited to revising KORUS or sparring with China on steel, aluminum and solar panels. Rather, it represents a global worldview hostile towards the multilateral trading system itself. He has renewed his threat to withdraw from NAFTA, paused the Transatlantic Partnership with the EU, and spurred the complete withdrawal from the Trans-Pacific Partnership in Asia.

The Trump Administration views the revised Korea deal as a successful model of forced bilateral negations, and will therefore attempt to replicate it around the world.

2.Trump Wants What He Wants.
According to reporting from Axios, the remarkably well sourced, unofficial backchannel, and preferred information leak recipient of the White House, Trump said to his Chief of Staff, “I want tariffs. And I want someone to bring me some tariffs… I know there are some globalists in the room right now. And they don't want the tariffs. But I'm telling you, I want tariffs.” 

Hinting at further evidence of the Trump Administration’s preference for hostage taking as the preferred model of trade policy going forward, one official declared: “the President was correct to undertake renegotiation. He was able to make it a better deal and win concessions that should have been won before … to create and take advantage of leverage in this situation in a way that helps U.S. workers and businesses.”

3. Trump’s Trade Strategy is Transactional.
Despite these relatively modest outcomes of the revised KORUS deal, the Administration trumpeted its ability to create jobs as a justification for the Trump Administration’s transactional and aggressive policy approach with an FTA partner country and key ally. But now that other countries see his negotiating approach, they can better prepare for any sort of trade dispute.

This suggests an opportunity for governments and industry leading companies to hedge against truly harmful policy outcomes by packaging small concessions as a net positive for U.S. jobs, the metric that matters most to Trump.

Conclusion

Trade deals are always supposed to create benefits for everyone involved, and while negotiators always pursue their national interests, they don’t gain anything from lopsided deals that fall apart because their counterparts can’t defend them politically at home. It’s a delicate balance, with spoken and unspoken sensitivities, which is one reason the negotiations take so long. 

By contrast, President Trump has a zero-sum view of trade, where anything good for the guy on the other side of the table is bad for the sucker who gave it to him. That combative alpha-male approach served Trump well in real estate, and it has worked for him in politics, too. In global trade, it was thought this would be a change of pace for him; the early evidence suggests the it may not be quite the change many anticipated. 

His approach may lead to small wins. The jury is out on more substantive and comprehensive negotiations. 

Still, questions remain as to whether this particular deal was a singular event or a new paradigm. While we wait to see which it was, there are three important steps every global company should take that will help arbitrate disagreements in advance and avoid becoming a high-profile candidate the Trump Administration – or the President himself – could target in pursuit of its protectionist trade enforcement agenda.

1. Expand Relationships at the Federal Level.
Initiate preliminary government relations mapping to the right federal agencies, and at the appropriate level for outreach. 

2. Strengthen State and Local Congressional Outreach.
Many of our clients operate facilities in multiple U.S. states. This means that multiple U.S. Senators and Congressmen whose districts contain your operations directly represent constituents who are also your employees. Put an American face on your business. Building local allies, validators, and advocates who can speak with a credible voice is key. 

3. Build Relationships with U.S. Business Trade Associations and NGOs.
Every client should consider expanding both institutional and personal relationships with key allies in the U.S. business community at large, as well as specific sectoral trade associations and environmental NGOs. 

By taking these three proactive steps, clients can demonstrate they don’t need to decipher the President’s words, because they’re focused on his actions.

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Joshua GardnerJoshua Gardner is a vice president in MSL’s Washington D.C. office and also serves as the North American lead in MSL’s Energy sector.
joshua.gardner@mslgroup.com

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