Withdrawing from KORUS: A Good Impulse, Driven by Bad Reasons, Whose Potential Will Be Squandered

Robert E. Scott

Robert E. Scott EPI Senior Economist and Director of Trade and Manufacturing Policy Research

The saying goes that even a stopped clock tells the correct time twice a day. This is a pretty good description of the Trump administration’s approach to trade policy: their analysis and motivations are almost never right, yet they occasionally hit on a decent idea. But then they move quickly off of it. This is illustrated perfectly in their recent moves regarding the Korea-U.S. Free Trade Agreement (KORUS).

News reports suggest that the Trump administration is preparing to withdrawfrom KORUS. The motivation for this seems more driven by Trump pique that the South Korean government is not rubber-stamping his preferred policy stance on the current tensions in the Korean peninsula, rather than on any coherent economic analysis.

Yet, it’s true that on pure economics, KORUS should be seen as a failure. The KORUS deal, approved in 2011, was supposed to result in rising U.S. exports. However, U.S. exports to Korea actually fell $1.2 billion between 2011 and 2016, while imports from South Korea soared—increasing the bilateral trade deficit by $14.4 billion and eliminating more than 95,000 jobs in the first three years alone.

The glaring omission in KORUS was failure to include enforceable provisions on currency policy. Korea is a well-known currency manipulator, and it also has the fourth largest current account trade surplus (the broadest measure of trade in goods, services, and income) in the world. Ending Korean currency manipulation and revaluing the won is the surest way to increase U.S. exports and stop the surge in Korean imports in the United States, demonstrating the value of this strategy for rebalance overall U.S. trade and helping to rebuild U.S. manufacturingRecent estimates suggest that rebalancing U.S. trade will require Korea to revalue the won by at least 32.7 percent.

This omission of currency provisions and the resulting U.S.-Korea trade imbalance has been true all throughout the Trump administration and yet it’s only now, in the midst of a foreign policy crisis on the Korean peninsula that has President Trump frustrated with South Korea’s independent stance, that the threats to withdraw from KORUS are being made. It is unfortunate that the president has chosen to use trade policy as an element of his ham-handed geopolitical maneuvering. In the past, this linkage between trade and foreign policy has usually meant trading away our manufacturing base in order encourage our trading partners to cooperate on foreign policy objectives, as Trump did earlier this year when offered China better terms on a trade deal “if they solve the North Korea problem.” Does it matter that the Trump administration’s reasons for withdrawing from KORUS are based on personal pique and bad foreign policy considerations? Isn’t withdrawing from a flawed trade treaty good enough?

Not really. Withdrawing from KORUS will do little-to-nothing to address the U.S.-Korea trade deficit that the Trump administration claims to care about. Genuine policy attention to currency misalignment would—but there is little to no sign that the administration knows or cares about this.

Withdrawing from KORUS simply to inflict political pain on a trading partner whose government is not being compliant on other foreign policy issues is a classic stopped-clock problem. The correct impulse to withdraw from the treaty will soon be left behind, and the correct actions to make trade work better for working Americans will be forgotten.

Posted In: Allied Approaches

Union Matters

An Invitation to Sunny Miami. What Could Be Bad?

Sam Pizzigati

Sam Pizzigati Editor, Too Much online magazine

If a billionaire “invites” you somewhere, you’d better go. Or be prepared to suffer the consequences. This past May, hedge fund kingpin Carl Icahn announced in a letter to his New York-based staff of about 50 that he would be moving his business operations to Florida. But the 83-year-old Icahn assured his staffers they had no reason to worry: “My employees have always been very important to the company, so I’d like to invite you all to join me in Miami.” Those who go south, his letter added, would get a $50,000 relocation benefit “once you have established your permanent residence in Florida.” Those who stay put, the letter continued, can file for state unemployment benefits, a $450 weekly maximum that “you can receive for a total of 26 weeks.” What about severance from Icahn Enterprises? The New York Post reported last week that the two dozen employees who have chosen not to uproot their families and follow Icahn to Florida “will be let go without any severance” when the billionaire shutters his New York offices this coming March. Bloomberg currently puts Carl Icahn’s net worth at $20.5 billion.

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