On Monday, President Trump and President Moon Jae-in of South Korea signed a revised U.S.-Korea (known as “KORUS”) free trade agreement on the sidelines of the United National General Assembly meeting this week in New York. In April 2017, President Trump indicated that he wanted to either renegotiate or terminate the then-five year old agreement. Since then, the parties have engaged in trade talks, under the auspices of the existing KORUS review procedures and otherwise, to update key provisions. Early on, the United States appeared to be primarily focused on changes to help reduce the United States’ bilateral trade deficit. In March 2018, the Office of the United States Trade Representative issued a summary of the agreed-upon outcomes of the negotiations, and released the draft text earlier this month, with emphasis on how the revisions will “rebalanc{e} our trade” and “reduce the trade deficit.”
The changes to KORUS focus on the auto sector, customs procedures, and pharmaceutical reimbursement. With respect to autos, the largest change is a 20-year extended phase-out period for the current 25% U.S. tariff on imports of light trucks from Korea. That tariff will now expire in 2041, instead of 2021, which, according to the U.S. International Trade Commission, will delay the anticipated increase of 59,000 Korean truck imports. Korea has also agreed to increasing the quota of U.S.-origin autos that meet U.S. safety standards (but not Korean safety standard) from 25,000 to 50,000 per manufacturer, per year. Korea further agreed to recognizing U.S. standards for auto parts exports necessary to service U.S. vehicles in Korea and a harmonized testing system for emissions standards. With respect to improving customs procedures, Korea will address onerous and costly customs verification procedures for U.S. exports, which have been particularly taxing for U.S. agricultural exports. Finally, Korea has promised to address its pricing and reimbursement policy for pharmaceuticals to align with existing KORUS commitments and ensure fair treatment for U.S. exports.
For Korea, successful renegotiation has earned it a break from the United States’ Section 232 tariffs on steel imports. Instead of being subjected to a 25% tariff, steel imports from Korea are subject to an absolute quota based on 70% of the average annual import volume of such products during the 2015-2017 period. Korea had initially been exempt from the tariffs pending further KORUS discussions. The final quota-based exclusion was announced on April 30, 2018, and on August 29, 2018, President Trump announced a review process for individuals to request tariff exclusions for imports beyond the quota.
While the White House is touting the updated agreement as a major do-over, the changes are understood to be fairly moderate. Notably, the new pact does not include any provisions on currency manipulation and does not allow for increased U.S. rice exports, which was a U.S. priority during the original talks 12 years ago. The changes being made will, however, improve predictability without major disruption to existing trade flows between the two countries.
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