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Apr 18, 2017 | 21:16 GMT

U.S.: Washington Will Re-Evaluate Its Trade Relationship With South Korea

(Stratfor)

The administration of U.S. President Donald Trump will review and reform its trade relationship with South Korea, including the free trade pact between the two, known as KORUS FTA, U.S. Vice President Mike Pence said April 18 during his visit to Seoul. The announcement came as Trump's administration finalized a broad review of the trade and currency exchange policies of major U.S. trading partners. In March, a report from the Office of the U.S. Trade Representative stressed that the KORUS FTA should be reconsidered.

That the KORUS FTA, the second largest U.S. free trade agreement, would be under review is unsurprising. The deal was negotiated under U.S. President George W. Bush and was reworked in 2010, before taking effect in March 2012. It was lauded as benefitting bilateral trade relations and was an integral part of the U.S.-South Korea alliance restructure under President Barack Obama's "Pivot to Asia" strategy. However, the deal has been criticized for its sloppy implementation and, more importantly, for contributing to the widening U.S. trade deficit to South Korea. The trade deficit has gone from $15.1 billion in 2011 to $28 billion in 2016, corresponding with the simultaneous decline in U.S. exports to South Korea (a drop of 1.2 billion since 2011).

It's unclear whether Pence means that the United States will try to completely renegotiate the trade pact. Pence said that the United States would review the trade deal, but that process has already begun. Apart from a complete renegotiation, the United States could pressure South Korea to break down other trade barriers. If Pence is hinting at a complete renegotiation, Washington will still focus on renegotiating its free trade agreement with Mexico (NAFTA) first.  Regardless, Seoul has already begun responding by using promises of investment into the United States and promises of increased U.S. exports to South Korea to ease potential trade spats. This perhaps partly explains the reduction of the U.S deficit to South Korea for the period between December and February by 30 percent compared from a year earlier.

The U.S. bilateral trade deficit is largely attributable to two sectors: automobile and electronics. Automobiles alone account for around two thirds of the deficit. The United States will likely pressure South Korean companies to invest more in the United States and North American automotive sectors and to build cars in the United States — but that's not necessarily something trade negotiations always cover. But South Korea has strategic reasons to avoid having trade relations taint its broader relations with the United States, especially now that South Korea is faced with increased North Korean provocation, a withering economy and possible economic retaliation from China over South Korea's planned deployment of an advanced U.S. missile defense system.

Fear of U.S. protectionism and Chinese economic retaliation has prompted South Korea to work to diversify its economy. South Korea has accelerated resuming or initiating free trade agreements with other partners. In March, South Korea's Trade Ministry revealed that it will launch free trade negotiations with Mexico, the Eurasian Economic Union and the Gulf Cooperation Council. None, however, will replace the U.S. market.

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