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North Korea threat as trade leverage?

July 17, 2017

The US is pressuring the new South Korean government to revise a five-year-old economic agreement with implicit suggestion that it could rethink the all-important defense arrangement. Julian Ryall reports from Tokyo.

USA Moon Jae-in und Donald Trump
Image: picture alliance/newscom/K. Dietsch

Despite concerns about its auto, steel and home electronics sectors, the South Korean government appears to be willing to accede to the demands of the United States to renegotiate a bilateral free trade agreement that went into effect in March 2012.

Washington formally requested on July 12 that the two sides meet for discussions on revising the trade agreement - a pact that US President Donald Trump has described as a "job-killer" for US companies. And while Seoul has suggested that it is not immediately in a position to open talks because the administration of President Moon Jae-in has not yet appointed a new trade minister, it has not refused point-blank to negotiate a deal that the US will demand should be more weighted in its favor.

Seoul's rapid capitulation, analysts believe, is the result of the implicit suggestion from Washington that it could walk away from the security treaty that ensures South Korea's protection from North Korea if its demands are not met.

In its formal letter to the government in Seoul, US Trade Representative Robert Lighthizer proposed that a special Joint Committee Meeting take place in Washington within the next 30 days to consider revisions to the trade deal. The reason cited for the revisions was that the US has experienced a persistent trade deficit in goods trade with South Korea.

Read: South Korean President Moon Jae-In calls for rare talks with North

'Free, fair, balanced trade'

"Korea is an important ally and key trading partner, and in order to strengthen our relationship, we need free, fair and balanced trade," Lighthizer's letter stated. "A key focus of the Trump Administration is on reducing our trade deficits with trading partners around the world, and we have real concerns about our significant trade imbalance with Korea."

According to US statistics from the office of the US Trade Representative, the US trade deficit in goods with Korea has soared from $13.2 billion (11.5 billion euros) before the deal was signed to $27.6 billion (24 billion euros) today. The office adds that US exports to Korea have shrunk over the last five years.

As well as the need to appoint a new trade minister, the South Korean administration has first called for an examination of the statistics to identify the cause of any imbalance in trade, but Seoul has signaled that it is willing to talk.

"It is hugely ironic that when this Free Trade Agreement (FTA) was first being debated in South Korea, President Lee Myung-back came in for terrible criticism and there were huge demonstrations against the deal," said Rah Jong-yil, a former South Korean ambassador and a senior government adviser.

"One of the strongest opponents of the deal was Moon, who is now the president and in the position of having to defend it," he pointed out. "But, to me, it is clear that this government is willing to renegotiate the agreement to the advantage of the US."

And while neither side has stated that the security relationship is a contributing factor in any decision, Rah believes it is.

Kweku Mann
North Korea accelerates nuclear fuel processing, satellite images suggestImage: Kate Hairsine

'Hidden leverage'

"There is hidden leverage and this incumbent Korean government realizes that to keep the security guarantee provided by the US, it needs to make certain concessions to US demands," Rah said.

Nevertheless, specific trade sectors in Korea are staking their claims ahead of any discussions, with the auto sector conceding that vehicles exported to the US have been worth $15.4 billion since the deal came into effect - nine times higher than US cars sold in Korea. But, they point out, the rate of growth of auto exports to the US was down 10.5 percent, while imports of US cars into Korea have climbed 37 percent, suggesting that US auto firms are benefitting from the free trade deal.

Steel firms have also pointed out that they have been investigated over allegations of dumping in the US market, with Posco, South Korea's largest steel manufacturer, hit with 60 percent anti-dumping tariffs on imports of both cold and hot-rolled steel sheeting last year.

Jeff Kingston, director of Asian Studies at the Japan campus of Temple University, believes South Korean firms have good reason to be concerned about the new attitude being displayed by the Trump administration.

"This 'America First' policy means that other countries are required to do something that is to the benefit of the US," he told DW, adding that Trump's "notion of free trade is that it should also be fair trade."

- Trump turns up trade tension with South Korea

- Increasingly desperate North Koreans defect to South Korea

Withdrawal from TPP

Even before he was elected in November, Trump campaigned hard on the trade deals that he claimed were damaging the US economy, including the Trans-Pacific Partnership, which he withdrew from shortly after entering the White House.

Trade imbalances also exist with both Japan and China, Kingston points out, although Trump has eased up on his criticisms of Beijing as a currency-manipulator and abuser of trade agreement since he met with President Xi Jinping.

It is possible that the US leader decided to go after South Korea first because of its relatively weak geo-political position, analysts suggest.

"The South Korean government understands that the trade imbalance is not politically sustainable to the US, which is also its key ally and partner," Kingston said. "Which is why they are willing to renegotiate the deal, although they are unlikely to give in to all the Trump administration's demands."

"They will have to determine Washington's bottom line and then decide just how far they are willing to go," he added. "The US has the stronger hand because of the threat of North Korea, so they are playing a game. But it is a game that will inevitably leave some scar tissue on the alliance because Washington has taken advantage of Seoul's vulnerabilities."

Frightening message from North Korea

Julian Ryall
Julian Ryall Journalist based in Tokyo, focusing on political, economic and social issues in Japan and Korea