Global Economy / U.S. using security concerns as negotiating tool

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By Tatsuya Sasaki / Yomiuri Shimbun Senior Writer

The U.S.-South Korea free trade agreement underwent major modifications at the demand of U.S. President Donald Trump. For Japan, the method employed by the United States, in which security is “taken hostage,” is not simply someone else’s problem.

Trade issues became a major topic of discussion at the recent U.S.-Japan summit as well. How can Japan avoid bearing the brunt of “America First”?

Trade deficits impact talks

“Because right now it’s an unfair deal, frankly, to the United States … But we are going to finalize a new deal fairly soon,” Trump said during the Japan-U.S. summit talks on April 17, referring to the trade deal with South Korea when he was discussing trade relations with the country in connection with the North Korea issue.

Immediately after an agreement was reached on modifications to the U.S.-South Korea FTA in March, a high-ranking U.S. official declared it a major victory in the history of U.S. trade negotiations.

The Trump administration seeks to revise the North American Free Trade Agreement (NAFTA) and reduce the trade deficit with China, but there have been no notable results yet. Given this, it can be seen that the modifications to the U.S.-South Korea FTA — on which swift agreement was reached in just 2½ months of negotiations — will be used to drum up support ahead of the U.S. midterm elections in November.

What were the details of this agreement — one the U.S. government is touting as a “historic victory”? The centerpiece is the automotive sector, a source of major discontent in the United States.

After the 2012 U.S.-South Korea FTA took effect, South Korea’s trade surplus with the United States grew. While it has been on a downward trend since 2016, it is still higher than it was prior to the effectuation of the FTA. The growth of the automotive-related trade surplus is particularly conspicuous: In 2017, more than 90 percent of South Korea’s trade surplus with the United States came from automotive-related trade.

In South Korea, growth in U.S. car imports is sluggish. General Motors Co. manufactures cars in South Korea, but has decided to close some factories, giving rise to the speculation that it might pull out of local production. While South Korea’s auto imports are rising overall, there are some who view that this trend is caused mainly by Japanese and other automakers exporting vehicles from the United States after the FTA took effect. As in the Japanese market, U.S. automakers are struggling in South Korea.

In this recent agreement, the number of vehicles that can be sold in South Korea as they are — if they meet U.S. safety standards — will be doubled from the current levels to 50,000 vehicles per manufacturer annually.

The United States will also postpone the removal of tariffs on South Korean-made pickup trucks from 2021 to 2041. According to local media and other sources, Hyundai Motor Co. had drawn up plans for exporting pickup trucks to the United States on the assumption that the tariffs would be abolished by 2021. However, the postponement of the tariff removal could force the company to review its initial plan. If production continues to shift to the United States, the effects cannot be ignored.

In the pharmaceutical sector, the United States demanded that South Korea review a system that provides favorable terms for the pricing of new drugs developed in South Korea. The two countries agreed that Seoul will carry out relevant law revisions by the end of 2018.

The United States has strength in drug manufacturing, and for this reason Washington is believed to have strongly pressured South Korea for concessions.

Skirting the rules

Outside of the FTA, another agreement has drawn attention.

In the steel manufacturing sector, South Korea will curb its exports volume to the United States to 70 percent or less of the average annual volume exported from 2015 through 2017.

On the grounds of national security, the United States invoked import restrictions on steel and aluminum imports by imposing additional tariffs, but South Korea was exempted in exchange for cutting down on its exports to the United States.

Restrictions on the volume of imports and exports are prohibited, with few exceptions, by the General Agreement on Tariffs and Trade, which World Trade Organization rules are based on. This is because restricting trade volume is considered more protectionist than tariffs, which just affect prices.

There is a view that this most recent agreement runs counter to WTO rules.

Currency manipulation

Further cause for concern is the “currency clause” (see below). According to the U.S. government, the United States and South Korea are expected to agree to ban currency manipulation that benefits exports, and ensure transparency and accountability of monetary policy. The United States sees it as a problem that the South Korean won remains weak despite the country’s current account surplus, saying it is because South Korea is guiding the won lower.

“Some people in South Korea hold a favorable view on [the review of the U.S.-South Korea FTA agreement] because it protected the agricultural sector, among others. But on the other hand, South Korea ended up being forced to swallow U.S. demands on many items, because [the trade issue] was linked [by the United States] to the security issue,” said Shinobu Kikuchi, a senior researcher at Mizuho Research Institute.

When the U.S.-South Korea FTA came into effect, it was believed South Korea stole a march on Japan with a trade strategy that is advantageous to its exports, causing a sense of crisis to spread throughout Japan’s industrial sector. However, this symbolizes the difficulty of undertaking bilateral negotiations with the major power under the vocally protectionist Trump administration.

On March 29, Trump used security to rattle South Korea even more, saying a formal agreement might be delayed until the United States reaches an agreement on denuclearization with North Korea.

Food for thought

The U.S. trade deficit with Japan is larger than the one it has with South Korea. Having insisted on a bilateral agreement at the recent summit talks, the Trump administration is expected to increase pressure on Japan over FTA negotiations. A senior Japanese government official voiced concern over a possibility that the U.S.-South Korea FTA would “set the tone” for trade negotiations between the United States and Japan.

Some of the details of the U.S.-South Korea FTA overlap with the provisions insisted on by the United States during the Trans-Pacific Partnership free trade pact negotiations. A currency clause was brought up in those talks, but it was not incorporated into the TPP agreement due to objections from Japan and other countries.

If the United States and South Korea conclude a formal agreement on currency, the United States could make the same demand to Japan. Incorporating a currency clause, in particular, ought to be avoided because it could constrain large-scale monetary easing, which is vulnerable to criticism as a tool for guiding the yen lower.

How should Japan handle this situation? What differs in the case of South Korea is that Japan holds the card of the 11-nation TPP, which it spearheaded. First and foremost, the TPP must be put into effect as quickly as possible. It should create a basis for Japan to say that further concessions would be difficult. The United States should be encouraged to return to the TPP framework after that.

The economic partnership agreement with the EU, for which negotiations were concluded last year, may also serve as a means to evade possible tough demands by the United States.

Japan also has a big role to play in stopping the tide of protectionism. Japan must continue to explain to the United States that trade is not a “zero-sum game” in which one’s own country comes first, but rather should bring about a mutually beneficial “win-win” relationship.

■ U.S.-South Korea free trade agreement

The free trade agreement between the United States and South Korea took effect in March 2012. It specified that tariffs on 95 percent of industrial and consumer goods would be abolished within five years of it taking effect. In the automotive sector, the 2.5 percent U.S. tariff on passenger vehicles would be abolished after five years. South Korea would lower its tariff from 8 percent to 4 percent, and remove it entirely after five years. At the time it took effect, the U.S. government expected its exports to increase by $11 billion and create 70,000 jobs.

■ Currency clause

This is intended to prevent a country from guiding its currency lower to help domestic industries export products. During the TPP negotiations that included the United States, the U.S. automobile and other industries were concerned about a possible increase in imports from Japan. They insisted on incorporating a currency clause into the TPP agreement. However, because exchange rates are determined by free trade on the financial markets, Japan’s position is that “a currency clause does not fit with trade treaties.”

 

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