Initial Results Of The South Korea-U.S. Trade Agreement

Includes: EWY, SKOR-OLD
by: Howard Richman

On June 19, Pat Buchanan wrote a commentary (Now Korea is Cleaning Our Clock) about the initial results of the Korea US free trade agreement (KORUS). He begins:

"The entry into force of the U.S.-Korea trade agreement on March 15, 2012, means countless new opportunities for U.S. exporters to sell more made-in-America goods, services and agricultural products to Korean customers - and to support more good jobs here at home."

Thus did the Office of the U.S. Trade Representative rhapsodize about the potential of our new trade treaty with South Korea.

And how has it worked out for Uncle Sam?

Well, courtesy of Martin Crutsinger of The Associated Press, the trade figures are in for April, the first full month under the trade deal with South Korea.

And, surprise! The U.S. trade deficit with Korea tripled in one month. Imports from South Korea jumped 15 percent to $5.5 billion in April, while U.S. exports to South Korea fell 12 percent to $3.7 billion. Suddenly, the U.S. trade deficit with Seoul surged to an annual rate of $22 billion.

This result was predicted by the Economic Policy Institute, as pointed out by Sam Williford back on March 21 2011 (NAFTA Is Proof that KORUS Will Be Disastrous), when he wrote:

Projections from the U.S. International Trade Commission show no net gain in jobs from KORUS, while the Economic Policy Institute projects a loss of 159,000 jobs during the first seven years of the deal. Most economists also expect the deal to further widen America's trade deficit with South Korea. Faced with such overwhelming evidence, why has the Obama administration pushed so hard for this deal?

South Korea is one of the Asian mercantilist countries which manipulates currency exchange rates in order to give its industries a competitive advantage over American and other foreign industries in U.S. and world markets. According to Federal Reserve Chairman Ben Bernanke (see Figure 8), from September 2009 to September 2010 the South Korean government devoted 4.24% of its country's GDP to the purchase of foreign exchange reserves. Conspicuously absent from KORUS was any requirement that the South Korean government end its currency manipulations.

On June 29, 2012, I argued on the Trade and Taxes blog that I share with my father and son that any trade agreements negotiated by the United States, including KORUS, should include a clause such that any country running both an overall trade deficit and a bilateral trade deficit be permitted to invoke a trade balancing across-the-board tariff (i.e., a scaled tariff) designed to take in half of the bilateral deficit as revenue. I even included the exact wording that such a clause should take. Such a clause in KORUS would have turned KORUS into a mutually beneficial trade agreement.

NAFTA could have been a success had it included just such a balanced trade provision. Unfortunately, Mexico uses currency manipulation in order to run trade surpluses with the United States. According to Federal Reserve Chairman Ben Bernanke (see Figure 8), from September 2009 to September 2010 the Mexican government devoted 3.64% of its country's GDP to the purchase of foreign exchange reserves.

Balanced trade is far more important than free trade, as the U.S., Portugal, Italy, Greece and Spain are learning the hard way. When trade is imbalanced, the deficit country loses industry, jobs and wealth.

Both Obama and Romney plan to make more free trade agreements with additional Asian mercantilist countries over the next four years. Neither has indicated that he plans to include balanced trade clauses in those agreements. U.S. leaders keep repeating the same foolish mistakes again and again and again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.