INSIDE KORUS FTA - A Five-year Achievement -

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1 Issue Papers INSIDE KORUS FTA - A Five-year Achievement - Jung, Hyesun(hsjung1110@kita.net) Kim, Eunyoung(ordiy@kita.net) 01. Trade in Goods : General Performance The Korea-U.S. FTA(KORUS) has led to a significant growth in bilateral trade. Although world trade decreased at a CAGR of 2.7% from 2011(year before implementation of KORUS) to 2016(most recent complete year), Korea-U.S. trade increased at a modest CAGR of 1.7%. This growth has brought two-way trade between Korea and the U.S. to a record level of $109.7 billion and created new market access opportunities for both countries. *) Korea-U.S. Trade in Goods World Trade Korea-U.S. Trade 18,338 18,496 18,952 19, ,489 15, , World Trade Organization Thanks to KORUS, the U.S. share of Korea s total imports has grown considerably. Within five years of KORUS implementation, the U.S. import market share in Korea increased by 2.14%p from 8.50% in 2011 to 10.64% in Although the U.S. market share in Korea had fallen prior to KORUS, this trend has since been reversed. Last year, the U.S. market share in Korea reached its highest point since Korea s share in the U.S. import market has also steadily grown from 2.57% to 3.19%. *) This report is a summary of Trade Focus No. 7, published by IIT in March The full text(korean version) is available at 1

2 Bilateral Market Share Under KORUS FTA (%) U.S. Market Share in Korea Korea Market Share in the U.S %p %p Source : U.S. Department of Commerce, Korea International Trade Association(K-stat) Korea s trade surplus in goods with the U.S. increased by $11.6 billion between 2011 and This growth of trade surplus, however, has slowed from 2014, eventually decreasing by $2.6 billion in Korea s Trade Surplus with U.S <2.2> <3.6> <5.7> <4.5> <0.8> <-2.6> Note : Figures in < > indicate changes from previous year. In spite of these promising developments, some critics have singled out KORUS as the main factor affecting the U.S. trade deficit with Korea. Contrary to such claims, the USITC has previously addressed the relationship between U.S. free trade agreements and its trade balances, stating that KORUS has played a role in lowering the U.S. trade deficit. According to their report, KORUS reduced the U.S. trade deficit with Korea by $15.8 billion in 2015; without this agreement, the trade deficit would have surged to $44 billion. Estimated Improvement by U.S. Trade Agreements on Bilateral Merchandise Trade Balances(2015) Partner country Trade balance Estimated trade balance absent trade agreement Improvement in bilateral trade balance Canada Korea Australia Mexico Israel Singapore Source : U.S. International Trade Commission 2

3 02. Trade in Goods : Korea s Imports from the U.S. KORUS has created substantial new market access opportunities for U.S. exporters. Korea s total imports fell at a CAGR of 5.0%, while imports from the U.S. only slightly decreased from 2011 to Korea s Imports from World and U.S. CAGR World % U.S % [Passenger cars] Korea s tariffs on U.S.-made passenger cars fell from 8% to 4% in 2012, and were subsequently eliminated in 2016 under KORUS. With the increase in popularity of imported cars among Korean consumers, the reduction of tariffs has yielded moderate growth of imports from the U.S., increasing from 12,816 units in 2011 to 59,237 in Since the implementation of KORUS, the U.S. share of Korea s total passenger car imports has grown 9.0%p, reaching 20.1% in In fact, the U.S. has become the second largest passenger car exporter to Korea since 2015, surpassing Japan. Korea s Passenger Car Imports(HS 8703) (units) 70,000 Imports from the U.S. EU U.S. Japan (market share %) , ,816 27,758 31,199 33,618 48,357 59, Source : Korea Automobile Manufacturers Association 3

4 [Pharmaceutical products] KORUS has provided greater access to the Korean market for U.S. pharmaceutical companies. Korea s imports of pharmaceuticals from the U.S. increased by a CAGR of 12.9% for the past five years. In particular, imports of FTA-beneficiary products increased significantly, such as thyroid and parathyroid hormone preparations and anti-cancer preparations. Korea s Imports of U.S. Pharmaceuticals ($1 billion) 1,040 1,014 1,124 ($1 billion) Tariff concession category : Immediate Elimination 8% 0%(15 th Mar, 2012~) Tariff concession category : 3-year phase-out 8% 5.3% 2.6% 0%(1 st Jan, 2014~) Preparations containing thyroid and parathyroid hormones Anti-tuberculosis preparations, anthelmintic preparations and anti-cancer preparations [Agricultural products] U.S. exports of agricultural products have seen significant growth in the Korean market since KORUS was entered into force. Following tariff elimination, cherry and almond imports grew respectively at a CAGR of 19.3% and 15.5% from 2011 to Moreover, although they account for only a small portion of Korea-U.S. agricultural trade, imports of U.S. avocado saw an impressive boost of 39.2% CAGR during the same period. Products Korea s Imports of U.S. Agricultural Products Tariff Concession Category (Unit : $1 million, year-on-year %) Value CAGR Fruit (3.2) (6.1) 9.1% - Cherry 24%, Immediate elimination (-2.6) (-8.3) 19.3% - Lemon 30%, 2-year phase-out (30.3) 30.8 (-7.2) 28.2% - Avocado 30%, 2-year phase-out (38.2) 6.8 (59.8) 39.2% Nuts (7.6) (-27.2) 9.6% - Walnut 45%(In-shell walnuts), 15-year phase-out (5.3) 84.5 (-34.6) 0.8% - Almond 8%, Immediate elimination (10.6) (-24.4) 15.5% Wine 15%, Immediate elimination (8.9) 21.8 (-5.6) 12.0% Beef 40%, 15-year phase-out (4.9) 1,035 (29.1) 9.6% 4

5 Beef imports also reached an all-time high of over $1 billion in KORUS has given U.S. beef a 5.3~5.4%p tariff advantage over Australian beef in the Korean market, resulting in a narrowing of the market share gap. Korea s tariffs on imported beef(40%) will be phased out : * Over 15 years from 2012 under KORUS FTA * Over 15 years from 2014 under Korea-Australia FTA Shares of U.S. and Australia in Korea s Beef Imports(by Weight) Australia U.S (market share %) %p 7.4%p Trade in Goods : U.S. Imports from Korea The U.S. has recently been enjoying something of an economic boom, having clearly recovered in terms of employment and consumption, facilitating an increase in demand for imports. As a result, U.S. imports from Korea have continually increased for both FTA beneficiary and non-beneficiary products until In 2016, however, U.S. imports from Korea declined by 2.6% to $69.9 billion. This was mainly due to a decrease in Korean passenger car imports, which account for one-fourth of total U.S. imports from Korea. Although the U.S. import tariff of 2.5% on passenger cars was eliminated under KORUS in 2016, U.S. imports actually fell 7%(HS 8703). * Product classification reflects the entry into force of Information Technology Agreement 2(ITA2) and elimination of tariffs on Korean-made passenger cars under KORUS(U.S. tariffs on Korean passenger cars remained at 2.5% until 2015, and eliminated in 2016). For this reason, Korean passenger cars were categorized as non-beneficiary products from 2011 to 2015 and then re-categorized as beneficiary products from As a result, U.S. total imports of beneficiary products increased to $38.2 billion in The import growth rate of beneficiary products, however, was 6.0%. This is attributable to the fact that year-on-year growth rates were calculated based on the categorization of beneficiary/non-beneficiary items in the respective years. 5

6 U.S. Imports from Korea (Unit : $1 billion, year-on-year %) Total (3.9) 62.2 (5.7) 69.6 (11.9) 71.8 (3.2) 69.9 (-2.6) - FTA-beneficiary (14.6) 21.2 (1.9) 22.4 (5.5) 23.5 (5.1) 38.2 (-6.0) - Non-beneficiary (-1.1) 410. (7.7) 47.2 (15.2) 48.3 (2.3) 31.8 (1.7) Source : U.S. International Trade Commission, U.S. Department of Commerce 04. Trade in Services Korea s imports of U.S. services have increased since KORUS has taken effect. The total amount paid for IPRs grew from $4.6 billion in 2011 to $6.8 billion in 2015 with stronger protection provided by KORUS. Korea s services trade deficit with the U.S. also increased from $10.9 billion to $14.1 billion. Korea s Services Trade with U.S. 40 ($1 billion) 26.8 Korea U.S. Korea U.S. Trade Balance Source : Bank of Korea Korea s overall trade surplus with the U.S., goods and services combined, was $11.7 billion in 2015(latest data available), which is significantly lower than its goods surplus of $25.8 billion. Korea s Trade Balance with U.S. in Goods and Services Goods Services Overall , Bank of Korea 6

7 05. Investment & Jobs The flow of capital in both directions has increased in the last five years, with Korea investing a total of $51.2 billion in the U.S. market over this period. Korean investment has contributed to the creation of 45,100 American jobs as of 2014, of which some 10,000 jobs have been newly created since KORUS was entered into force. These workers also earn an average income of 91,700 dollars, which is the highest level provided among Asian investors. Korea-U.S. Investment Total Korea U.S U.S. Korea Source : Export-Import Bank of Korea, Korea s Ministry of Trade, Industry and Energy Employment in U.S. by Korean Companies (Unit : 1 thousand employees) Source : U.S. Bureau of Economic Analysis 06. Conclusion Based on a model trade agreement, Korea and the U.S. have worked towards boosting bilateral trade in goods, services and investment. KORUS has helped generate win-win outcomes through the robust exchange of goods, services and investment, providing substantial opportunities for Korea and the U.S., despite having been in effect for only five years. According to a recent survey of 331 Korean companies that utilize this free trade agreement, 79.6% of exporters and 86.8% of importers have found KORUS helpful for their business. Satisfaction scores were higher among importers, suggesting that KORUS has positively impacted U.S. companies as well. 7

8 Has KORUS been helpful to your business? Very helpful Helpful Not very helpful Not helpful at all 63.3% 52.2% 34.6% 16.3% 18.9% 12.6% Export companies 1.5% 0.6% Import companies Note : This survey was conducted by KITA in February On the basis of a longstanding and friendly trade relationship, Korea and the U.S. must continue to build strong economic cooperation and deliver mutual benefits for both countries in the years to come. 8