Monday, July 3, 2017

It’s Time to Amend or Discard U.S.-Korean Trade Agreement

Press reports emerging on Monday, July 3rd, suggest that President Trump is pushing for a special 30-day review to amend the U.S.-South Korean trade deal known as KORUS. Last week, South Korean President Moon Jae-In said he wanted no change to KORUS, so it’s not yet clear what will happen. But there’s plenty of room to improve upon (or discard) a trade agreement that has delivered little to nothing for the U.S. Five years after it went into effect, KORUS has seen only continued Korean economic growth, but an escalating bilateral deficit for the U.S.

 In our view, President Trump might have done better to have begun last week’s meeting by congratulating President Moon on an important industrial event: in the second quarter of 2017, Samsung Electronics surpassed Intel as the world’s largest producer of semiconductors. According to analyst firm IC Insights, this year Samsung Electronics will sell around $64 billion worth of semis, compared to $61 billion at Intel. The difference in profitability is even starker, with Samsung’s semi division expecting operating profit of $28.5 billion this year. That compares to Intel’s forecast of $17.6 billion.

The success of Samsung Electronics in a crucial product category can be seen as a crowning achievement in the South Korean industrial strategy that has made the medium-sized East Asian country one of the world’s leading economic powers. South Korea has achieved world-class ranking in semiconductors, smartphones, motor vehicles, home appliances and other important industrial sectors. A key element of the success of the strategy has been to use an undervalued currency to help it run a large, persistent trade surplus with the rest of the world, enabling those businesses and their parent companies, the so-called chaebol conglomerates, to enjoy export-led growth.

See more trade and economic analysis here.

In 2016, our goods trade deficit with South Korea was $27.6 billion, more than double the $13.2 billion deficit we ran in 2011, the year before the KORUS trade agreement went into effect. Back in 2011, when KORUS was signed, President Obama forecast that KORUS would lead to an increase in U.S. exports to South Korea of some $10 billion to $11 billion, leading to 70,000 additional U.S. jobs. That “forecast” is based on an oversimplified economic model of trade that assumes that the U.S. economy has no unemployment and that sudden changes in trade patterns caused by a trade agreement do not cause any unemployment.

Today, in 2017, using commonly accepted estimates, far from generating jobs, KORUS has cost the U.S. economy some 80,000 net lost jobs.

A Better U.S. Trade Performance…Before KORUS!
As Figure 1 shows, our imports (red line) from South Korea surged under KORUS, up 23% in the five years from 2011 to 2016. Unfortunately our exports to South Korea fell slightly (2.7%). The failure of the U.S. to increase its exports to Korea is due largely to a set of Korean government policies that repress consumption in favor of investment and exports. According to the World Bank, South Korea’s current account balance in 2015 was a very high 7.7% of its GDP. That’s the best broad measure of consumer repression. On top of macroeconomic policies such as a won currency that is some 14% undervalued according to CPA calculations, the Korean government also uses non-tariff barriers to make it difficult for exports to penetrate that market.  The Korean government has engineered an oligopolistic business sector with strong incentives to export and penalties for failure.

Figure 1: US-Korea Bilateral Trade 2001-2016

Source: US Bureau of the Census

In the five years before KORUS (2006-2011), our exports to South Korea actually increased 35%, far better than in the KORUS years. That suggests the U.S would be better off to simply scrap KORUS. KORUS was a mistake. Let’s dump it and start again. That’s why they put erasers on pencils.

Irresistible Rise of South Korea
For those in any doubt as to where current trends are leading, have a look at Figure 2, showing real GDP per person on a comparable basis (known as purchasing power parity). South Korea grew at 4.3% in this period, triple the U.S. growth rate of 1.4%. If those growth rates continue, fourteen years from today, in 2031, South Korea will surpass the U.S. in GDP per person. In other words, they will become a richer country than us. You can be sure that every middle-income Asian nation is looking enviously at the South Korean economic model and striving to learn from it.

Figure 2: South Korea Set to Surpass U.S. in GDP per head in 2031

Source: CPA projections based on World Bank data

It’s time for the globalists to stop their patronizing assumption that other countries need privileged access to our consumer market. And time for the rest of us to learn a thing or two from “Gangnam Style.”

For your entertainment, below is my favorite version of Gangnam Style, covered by Ra-On, a Korean folk band based here in California. Enjoy!


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