Written Comment in Response to Executive Order Regarding Trade Agreement Violations and Abuses

Transcription

1 Written Comment in Response to Executive Order Regarding Trade Agreement Violations and Abuses July 31, 2017 Embassy of the Republic of Korea in the United States of America

2 Executive Summary The comment below is submitted on behalf of the Republic of Korea in response to a request for public comment by the United States. The position of Korea is as follows: 1) The Korea-U.S. Free Trade Agreement (KORUS FTA) has been a win-win deal for Korea and the U.S. alike, generating mutually beneficial outcomes such as expanded bilateral trade, improved market access, investment growth, and job creation through its faithful implementation by both countries. Two-way trade between Korea and the U.S. increased by 12% in 2016 compared to 2011 (the year prior to the KORUS FTA s entry into force), while global trade decreased by 12% in the same period. Benefiting from significant tariff cuts under the FTA, American companies have been actively expanding their market presence in key products in Korea. As a result, American products share of the Korean import market reached 10.6% in 2016, increasing by 2.1 percentage points from For instance, between 2011 and 2016, beef exports increased by 54%, cherry exports by 164%, and automobile exports by 356% respectively. 1 Tariff cuts under the KORUS FTA are estimated to have saved U.S. exporters up to $2.07 billion, which well exceeds the estimated $1.18 billion saved by Korean exporters. In terms of trade in services, the U.S. surplus with Korea increased from $6.9 billion in 2011 to $10.1 billion in 2016, thanks to improved access to the Korean services market under the KORUS FTA. The KORUS FTA has also boosted the flow of foreign direct investment (FDI) from Korea to the U.S., which contributed to creating a total of 45,100 jobs in the U.S. as of 2014, of which some 10,000 jobs were created since the KORUS FTA entered into force. The jobs created by Korea s investment are of good quality, paying the highest average salary of $92,000 among those created by Asian investors in the U.S. At the state level, exports to Korea increased for 40 out of 50 U.S. states after the KORUS FTA entered into effect. Whereas exports to Korea from all states increased by 19% annually on average during the five years since the KORUS FTA took effect, exports from Rust Belt states, in particular, increased by 45%. 2) The KORUS FTA has not been a major factor in the increased U.S. trade deficit in goods with Korea. Although the increase coincided with the implementation of the KORUS FTA, it was primarily driven by a combination of macro-economic as well as micro-economic factors. Moreover, this deficit is now on a decreasing trend and projected to decrease even further. Macro-economic Factors: One factor has been the relative strength of the U.S. economy compared to Korea s. Economic indicators, such as growth rates, unemployment rates, and consumption growth rates, have been stronger for the U.S. than for Korea since 2012, leading to a widening gap in demand for imports between the two countries. Micro-economic Factors: High-profile products, such as automobiles, information technology (IT) products and steel, have not benefited from the KORUS FTA, while the main factors behind the increased deficits in these goods have rather been the interconnected intraindustry supply chains between the two countries, and market factors such as improvements in product quality and brand image. 1 Source: Korea International Trade Association(KITA) 1

3 The U.S. tariffs on the three major product categories in which the U.S. records the largest trade deficits with Korea were zero already even before the KORUS FTA or have remained unchanged. Automobiles: The growth of the U.S. trade deficit in automobiles with Korea has been driven largely by an increase in imports from Korea due to strong growth of the U.S. domestic automobile market. The KORUS FTA has, in fact, contributed to reducing the U.S. trade deficit by significantly promoting U.S. exports to Korea in the automobile sector. During the five years from 2011 to 2016, U.S. exports of automobiles to Korea increased sharply by 356%. Moreover, when the U.S. tariff on Korean automobiles was eliminated in 2016, U.S. automobile imports from Korea actually decreased compared to the previous year. IT Products: Most IT products have not benefited from the KORUS FTA because they were exempted from tariffs under the Information Technology Agreement (ITA) even before the KORUS FTA came into force. Meanwhile, an increase in Korea s production and exports of IT products has resulted in an increase in its purchase of American equipment and technologies. Steel: The U.S. trade deficit in steel with Korea has no connection to the KORUS FTA, because U.S. steel imports from Korea were already subject to zero tariffs since Moreover, U.S. imports of Korean steel are on a decreasing trend. Investment from Korea tends to increase imports of intermediate goods from Korea, leading to trade deficits in certain industries. However, this type of trade deficit can be characterized as supplementary to local manufacturing and job creation because it strengthens global value chain collaboration. In addition, according to the Korean government s most recent data, 2 in the first six months of 2017, the U.S. trade deficit in goods with Korea was approximately $8 billion, representing a 38% decrease compared to $13 billion in the same period of the previous year. This suggests that the trade deficit is decreasing at an accelerating rate. Moreover, given that Korea is set to begin importing American shale gas in the second half of 2017, and the Korean economy is recovering, 3 the U.S. trade deficit with Korea is expected to further decrease, continuing its downward trend this year and beyond. Thus, bilateral trade is gradually becoming more balanced. 3) The KORUS FTA has been working as a platform to systemically resolve bilateral trade issues. Moreover, its strategic ramifications reach beyond the realm of trade. The two countries have smoothly resolved a variety of trade issues within the framework of the KORUS FTA by holding four joint committee meetings and 54 implementation committee meetings during the five years of implementation. The KORUS FTA, which is only five years old, contains the most recent and highest-level of trade rules in areas such as labor, environment and intellectual property rights (IPRs) among the trade agreements which the U.S. has put into force, setting a high standard of trade rules for future agreements. The KORUS FTA has not only helped elevate the U.S.-ROK alliance to a higher plane, but also become a symbol of the depth of the U.S. commitment and engagement in the Asia- Pacific region. 2 Source: Korea Customs Service 3 Source: Bank of Korea (GDP growth rate: 3Q %, 4Q %, 1Q %) 2

4 Introduction The Republic of Korea is not only an important security ally but also one of the key economic partners of the United States. As of 2016, the U.S. is Korea s second-largest trading partner, while Korea is the U.S. s sixth-largest trading partner. Since the KORUS FTA, this close bilateral economic relationship has created immense synergies by strengthening the economic partnership not only through expanded trade of goods and services, but also through increased FDI and diverse collaboration in high-tech industries. As a high-level, comprehensive platform for economic partnership, the KORUS FTA has been working in a mutually beneficial manner and has served as an effective and systematic mechanism by which both countries can work together to resolve bilateral trade issues whenever they arise. It has had overall positive impacts on expanding new market access for U.S. exporters and promoting investment from Korea, thereby strengthening the manufacturing sector and creating jobs in the U.S. The purpose of this written comment is to present Korea s view so as to contribute to an objective and fair review of the KORUS FTA in particular, pursuant to the Presidential Executive Order Addressing Trade Agreement Violations and Abuses issued on April 29, This comment makes the case through objective and statistical analysis that the KORUS FTA has been a mutually beneficial agreement. It also demonstrates that the Korea-U.S. economic partnership can be expected to further develop, strengthen and become more balanced, with the KORUS FTA at the core. KORUS FTA: A Win-Win Deal Expanding Bilateral Trade The KORUS FTA has contributed to an overall expansion of bilateral trade volume. It is important to note that two-way trade between Korea and the U.S. increased by 12% in 2016 compared to 2011, the year prior to the KORUS FTA s entry into force, while global trade decreased by 12% in the same period. Moreover, it is remarkable that Korea s bilateral trade with the U.S. showed such growth even as its bilateral trade with Japan, China and the EU decreased by 33.4%, 4.2% and 8.8% respectively during the same period. The expansion of bilateral trade promotes economic growth, contributes to job creation, fosters competitiveness of businesses, and enhances the welfare of consumers in both countries. Improving Market Access American companies have been actively expanding their market presence of key products in Korea since the FTA took effect in As a result, American products share of the Korean import market reached 10.6% in 2016, increasing by 2.1 percentage points from With regard to U.S. exports of major agricultural products to Korea, beef exports increased by 54% from $680 million to $1.05 billion, 5 cheese exports by 18% from $144 million to $170 million, and cherry exports by 164% from $40 million to $105 million in 2016 compared to All of these products benefited from significant tariff cuts under the KORUS FTA. 4 Source: Korea International Trade Association (KITA) 5 Source: Korea International Trade Association (KITA): For example, the Korean beef market share of the U.S. beef increased to 45.3% in 2016 from 38.9% in

5 According to the Korean government s most recent data, 6 tariff cuts under the KORUS FTA are estimated to have saved U.S. exporters up to $2.07 billion, which well exceeds the estimated $1.18 billion saved by Korean exporters. These numbers demonstrate the relative benefit that the KORUS FTA has had for American exporters compared to their Korean counterparts in terms of tariff savings. Indeed, without the KORUS FTA, the WTO weighted average tariff rate applied to imports would have been higher in Korea (5.6%) than in the U.S. (1.6%). 7 Given the KORUS FTA s contribution to U.S. exports, the U.S. trade deficit with Korea would have further expanded without the FTA. The U.S. International Trade Commission estimated that the U.S. trade deficit with Korea would have reached $44 billion, which is $15.8 billion more than the actual figure of $28.3 billion recorded in 2015, were it not for the KORUS FTA. 8 Increasing Investment and Creating Jobs The KORUS FTA has boosted the flow of FDI from Korea to the U.S. since When the four years before and after the agreement s entry into force are compared, Korea s average annual investment in the U.S. climbed by 2.6 times from $2.18 billion before the KORUS FTA to $5.72 billion after the KORUS FTA. Korea was the tenth-largest and the third-fastest-growing source of FDI in the U.S. in terms of average annual investment over the four years between 2012 and < Table 1. Korean FDI in the U.S. > (Unit: billion $) Growth Rate Annual Value Average Value %e *Source: U.S. Bureau of Economic Analysis According to the U.S. Department of Commerce, U.S. exports of goods shipped by Koreaninvested affiliates in the U.S. amounted to $24.8 billion in 2014, which is the fourth-largest after only Japan, the U.K. and Germany. This means that Korean investment in the U.S. significantly contributes to exporting products manufactured in the U.S.A. Investment Amount (Average in ) Investment Growth (Average in Compared to Average in ) U.S. Exports Shipped by Affiliates(2014) Luxem bourg 50.7 (1st) 209% (2nd) 0.2 (10th) < Table 2. Investment in the U.S. by Country > Japan 36.1 (2nd) 134% (4th) 78.7 (1st) * Source: U.S. Bureau of Economic Analysis Nether lands 25.9 (3rd) -5% (9th) 18.5 (7th) Canada Switzer land 21.4 (4th) 17% (6th) 12.8 (8th) 18.9 (5th) -36% (10th) 20.5 (6th) Ger many 15.8 (6th) -2% (8th) 45.0 (3rd) (Unit: billion $, %) France UK Ireland Korea World 12.9 (7th) 7% (7th) 22.7 (5th) 9.7 (8th) 46% (5th) 73.4 (2nd) 7.5 (9th) 1,385% (1st) 7.8 (9th) 5.7 (10th) 162% (3rd) 24.8 (4th) % Source: Ministry of Trade, Industry and Energy (MOTIE) 7 Source: Korea Institute for Industrial Economic & Trade 8 Source: Economic Impact of Trade Agreements Implemented Under Trade Authorities Procedures, 2016 Report (USITC, June 2016) 4

6 In addition, Korea has created high quality jobs for American workers through direct investment in the U.S. Korean FDI contributed to creating a total of 45,100 jobs in the U.S. as of 2014, of which some 10,000 jobs were created since the KORUS FTA entered into force. Moreover, the number of jobs created in the U.S. as a result of Korean FDI is much larger if indirect employment is also considered. For example, investment in the U.S. by Korean automakers created 29,000 jobs in terms of direct employment as of When indirect employment is taken into account, such as employment by local dealers, more than 110,000 jobs were created. The jobs created by Korea s investment are of good quality, paying the highest average salary of $92,000 among those created by Asian investors in the U.S. (according to data from the U.S. Department of Commerce). In this way, Korea has played an important role in realizing the goal of Hire American. < Figure 1. Korea vs. China : Comparison of Investment and Employment Effects> Growing U.S. Trade Surplus in Services The U.S. services trade surplus with Korea increased from $6.9 billion in 2011 to $10.1 billion in 2016, thanks to improved access to the Korean services market under the KORUS FTA. U.S. services exports to Korea, consisting mainly of IPR, legal, travel, transport and financial services, increased by 26.4% from $16.7 billion in 2011 to $21.1 billion in All in all, when goods and services are combined, the overall U.S. trade deficit with Korea declines drastically by approximately 36.4% from $27.7 billion to $17.6 billion, showing the steepest drop among the top ten 10 trading partners with which the U.S. has the largest trade deficits in goods. (See Figure 2.) < Table 3. U.S. Trade Balance with Korea in Goods and Services > Year Goods Services Overall * Source: U.S. Census Bureau, U.S. Bureau of Economic Analysis (Unit: billion $) 9 Source: U.S. Bureau of Economic Analysis 10 China, Japan, Germany, Mexico, Ireland, Vietnam, Italy, South Korea, Malaysia, India (from largest to smallest deficit in 2016) 5

7 < Figure 2. U.S. Trade Deficits including Trade in Services > Goods Goods+ Services Goods Goods+ Services Goods Goods+ Services Goods (Unit: billion $) Goods+ Services Goods 27.7 Goods+ Services 17.6 ~ ~ Korea 36.4% China 11.0% Japan 19.1% Germany 2.7% Mexico 11.8% State-Level Benefits * Source: U.S. Census Bureau, U.S. Bureau of Economic Analysis With regard to the state-level impacts of the KORUS FTA, it is remarkable that exports to Korea increased in 40 out of 50 states if the five years before ( ) and after ( ) the KORUS FTA are compared. In 14 states, such as Ohio, Mississippi, and Indiana, exports to Korea increased by more than 50%. It is also noteworthy that in Rust Belt states such as Pennsylvania, Ohio, Indiana, Michigan, Illinois, Wisconsin, and West Virginia, exports to Korea increased by 45% annually on average for during the five years after the KORUS FTA entered into effect, compared to an average increase of 19% for all 50 states. 11 As a result, exports from 23 states to Korea surpassed $500 million in 2016, and exports from eight states, such as Illinois, Pennsylvania, and California amounted to more than $1 billon. 12 Looking more closely, exports to Korea from several states of certain products such as automobiles, aircraft, cereals, meats and arms increased by more than 10 times in 2016 compared to For example, exports of automobiles from Alabama increased by 17 times, exports of aircraft from Arizona by 67 times, and exports of cereals from Iowa by 14 times. 13 Causes of the U.S. Trade Deficit with Korea Current Status of the U.S. Trade Deficit with Korea The U.S. trade deficit in goods with Korea increased from $13.3 billion in 2011 to $27.7 billion in 2016, despite the aforementioned mutual benefits of the KORUS FTA. After reaching a peak of $28.3 billion in 2015, however, the U.S. trade deficit with Korea has been trending downward, decreasing by approximately $600 million in More importantly, during the first five months of 2017, the deficit fell by approximately 33% ($4.5 billion) year on year from $13.9 billion to $9.4 billion. 11 Refer to the Figure 1 of Appendix. 12 Refer to the Figure 2 of Appendix. 13 Refer to the Figure 3 of Appendix. 6

8 < Table 4. U.S. Exports to and Imports from Korea > (Unit: billion $, year-on-year %) Year Jan.-May Exports 43.5 (12.0) 42.3 (-2.7) 41.6 (-1.5) 44.6 (7.1) 43.4 (-2.7) 42.3 (-2.7) 20.2 (23.4) Imports 56.7 (15.9) 58.9 (3.9) 62.4 (5.9) 69.7 (11.7) 71.8 (3.0) 69.9 (-2.5) 29.6 (-2.5) Overall Trade (14.2) (1.1) (2.8) (9.9) (0.8) (-2.6) 49.8 (6.6) Balance * Source: U.S. Census Bureau It is especially remarkable that from January 2017 to May 2017, the U.S. trade deficit with Korea showed the largest decrease of the U.S. s major trading partners; during the same period, the U.S. trade deficits increased with China, Canada, Japan, Mexico, and the EU. < Table 5. U.S. Exports to and Imports from Major Trading Partners > (Unit: billion $, year-on-year %) 2016 (January - May) 2017 (January - May) Exports Imports Balance Exports Imports Balance Canada (3.8) 125(10.6) -10(349.2) Mexico (4.0) 128(6.3) -30(14.2) EU (3.8) 174(2.6) -57(0.2) Korea (23.4) 30(-2.5) -9(-32.9) Japan (9.0) 56(5.4) -28(2.2) China (16.8) 188(8.1) -138(5.3) * Source: U.S. Census Bureau According to the Korean government s most recent data, the U.S. trade deficit with Korea during the first half of 2017 decreased by 38% ($5 billion) year on year from $13.2 billion to $8.2 billion. This downward trend is projected to continue this year and beyond at an accelerating rate. Moreover, given that Korea is set to begin importing American shale gas and aircraft in the second half of 2017, and that the Korean economy is recovering, 14 the demand for U.S. imports is expected to grow, leading to more balanced bilateral trade. Causes of the Increased U.S. Trade Deficit with Korea According to our analysis of the U.S. trade deficit in goods with Korea, the KORUS FTA has not been a major factor in the increased deficit. This section will examine the real causes of the twofold increase in the U.S. trade deficit with Korea between 2011 and 2016 in spite of the aforementioned recent trends. The analysis will show that although the increase coincided with the implementation of the KORUS FTA, it was primarily driven by a combination of macro-economic as well as micro-economic factors. 14 Source: Bank of Korea (GDP growth rate: 3Q %, 4Q %, 1Q %) 7

9 Macro-economic Factors One factor contributing to the U.S. trade deficit with Korea has been the relative strength of the U.S. economy compared to Korea s. Since July 2009, the U.S. has seen 97 consecutive months of economic expansion accompanied by a recovery in domestic demand. 15 In addition, the U.S. s average annual economic growth rate increased by 1.5 percentage points from 0.6% in the five years before the KORUS FTA came into effect ( ) to 2.1% over the next five years ( ). During the same period, Korea s average annual economic growth rate decreased by 1.0 percentage point from 3.8% to 2.8% due to worsening domestic demand conditions. In addition, Korea s imports decreased by a larger margin than its exports from 2011 to 2016, resulting in a growing recessionary trade surplus. 16 (See Table 6 below.) < Table 6. Average Economic Growth Rates of Korea and the U.S. > Country Gap Korea %p U.S %p * Source: World Bank (Unit: %) Other economic indicators (see Figure 3 below), including unemployment rates and consumption growth rates, demonstrate the relative strength of the U.S. economy compared to Korea s. Consequently, U.S. imports have continually increased at a higher rate than Korea s, leading to a widening gap in demand for imports between the two countries. These factors have inevitably caused the U.S. trade deficit with Korea to expand. < Figure 3. Comparison of Economic Indicators > Unemployment Rate (%) Consumption Growth Rate (%) Import Growth Rate (%) *Source: IMF * Source: Bank of Korea, U.S. BEA * Source: KITA, U.S. Census Bureau 15 Following a contraction phase lasting from December 2007 to June 2009, the current expansion phase of the U.S. economy has continued from July 2009 to the present. (Source: National Bureau of Economic Research) 16 Korea s imports from the world decreased by 22.5% while its exports to the world decreased by 10.8% in 2016 compared to (Source: Korea International Trade Association) 8

10 Micro-economic Factors Analysis of Major Deficit Products Our analysis shows that the U.S. trade deficit with Korea is highly concentrated on a small number of high-profile products, in particular, automobiles, IT products such as semiconductors and cellular phones, and steel. In 2016, the sum of the U.S. trade deficits with Korea in those three product categories amounted to $26 billion, which is equivalent to 94% of the total U.S. trade deficit with Korea. Nonetheless, it is evident that the marginal impact of the KORUS FTA on the U.S. trade deficit in these product groups has been minimal, since their tariff rates were either zero already even before the KORUS FTA or remained unchanged. In automobiles, the U.S. recorded a $14.5 billion trade deficit with Korea in One of the main causes of the U.S. trade deficit in automobiles has been an increase in imports from Korea due to strong growth of the U.S. domestic automobile market and market factors such as improvements in product quality and brand image. Domestic market sales in the U.S. rose sharply by 37% from 13 million vehicles in 2011 to 18 million vehicles in As for the effect of the KORUS FTA, it can accurately be said that the KORUS FTA has contributed to reducing the U.S. trade deficit by significantly promoting U.S. exports to Korea in the automobile sector. During the five years from 2011 to 2016, U.S. exports of automobiles to Korea increased sharply by 356%. 18 Consequently, car imports from the U.S. overtook those from Japan, and the U.S. share of Korea s imported car market rose to rank second ahead of Japan in 2015, with its lead over Japan gradually growing. (See Figure 4.) < Figure 4. Korea s Automobile Imports by Country > (Unit: thousands) In contrast, Korea s exports to the U.S. increased by only 79% from 2011 to Moreover, when the U.S. tariff on Korean automobiles was lowered from 2.5% to 0% in 2016, the fifth year after the entry into force of the agreement, U.S. automobile imports from Korea actually decreased by 7% compared to the previous year. As a result, the U.S. deficit in automotive trade also declined in 2016, from $16 billion to $14.5 billion. 17 Source: Korea Automotive Research Institute 18 Source: Korea International Trade Association (KITA) 19 Source: KITA 9

11 < Figure 5. Comparison of Tariffs and Auto Exports > Korean Tariff and U.S. Auto Exports to Korea U.S. Tariff and Korean Auto Exports to U.S. * Source: U.S. Census Bureau Moreover, the Korean automobile industry invested $10.3 billion in the U.S. as of 2016, and the direct employment created thereby in the U.S. amounts to about 29,000 jobs whereas the indirect employment amounts to more than 110,000 jobs. Korean automobile companies plan to invest an additional $3.12 billion in the U.S. in the future. Similarly, in the IT sector, it should be noted that most IT products have not benefited from the KORUS FTA because these products were exempted from tariffs under the ITA even before the KORUS FTA came into force. Consequently, the trade deficits in these products were not affected by the KORUS FTA. On the other hand, the U.S. has gained significant benefits from the interconnected value chain between the two countries and trade in goods and services in this sector with Korea. For example, when Korean companies such as Samsung and LG manufacture and export smart phones, they use U.S. technologies and parts, such as CDMA and application processors from Qualcomm. This leads to increased royalties on U.S. IPRs and increased U.S. exports of parts to Korea, ultimately improving the trade balance in goods and services. U.S. charges for the use of IPRs on industrial processes to Korea increased significantly by 33% from $2.4 billion in 2011 to $3.2 billion in Another example can be found in the semiconductor industry, where an increase in Korea s production and exports of semiconductors has resulted in an increase in its purchasing and importing of American equipment to manufacture semiconductors. In fact, the U.S. exported approximately $2.7 billion in semiconductor manufacturing equipment to Korea in 2016, making such equipment the U.S. s second-leading export product to Korea behind aircraft. 21 In the first three months of 2017, exports of semiconductor manufacturing equipment further increased by 93.5%, making it the number one U.S. export product to Korea. These examples described above underline how much the Korean and U.S. IT industries are closely linked together and complementary to one another. In addition, the U.S. records a surplus with Korea if we factor in the trade balance across the entire semiconductor industry including DRAM modules, non-memory semiconductors and equipment. In steel, the U.S. steel trade deficit with Korea has no connection to the KORUS FTA, because U.S steel imports from Korea were already subject to zero tariffs since 2004 when major 20 Source: U.S. Bureau of Economic Analysis 21 Source: U.S. Census Bureau 10

12 steel producing countries, including Korea and the U.S., agreed to eliminate tariffs for most steel products. Moreover, imports of Korean steel significantly decreased by around 30.4% in 2016 compared to Korean steel products account for a very small share of only around 3% of the total steel consumption in the U.S., which dropped to 3.2% in 2016 from 3.8% in In particular, around 81% of Korean steel exports to the U.S. are already subject to antidumping and countervailing duties (AD/CVD). Some U.S. companies have alleged that subsidies are provided, but such claims are not correct; the Korean government has not provided any illegal subsidies. As a security ally, Korea is a safe and reliable supplier of steel, and Korea s steel exports to the U.S. have limited adverse effects on U.S. security. Korean steel products exported to the U.S. are supplied mostly to local subsidiaries invested in by Korean companies that have no relevance to U.S. national defense. Despite U.S. concerns that dumped Chinese steel is used as an input to produce Korean steel products exported to the U.S., only around 2% of Korean steel products exported to the U.S. used Chinese inputs as of Korea is also participating in the Global Forum on Steel Excess Capacity, and Korean steel companies have been pushing ahead with business restructuring, including voluntary capacity reduction. There are concerns over possible negative effects on Korean companies investment in the U.S. if steel imports are restricted based on Section 232 of the Trade Expansion Act. Korean steel companies and related companies have invested $5.7 billion in the U.S. These companies are expected to have difficulty carrying out future investment plans if it becomes difficult for them to source raw materials. The increase in steel prices in the U.S. would have adverse effects on the business operations and employment of steel-consuming companies and reduce benefits for consumers. Increasing Investment-related Imports One notable aspect of U.S.-Korea trade is that because of the interconnected nature of intraindustry supply chains between the two countries, investment from Korea tends to increase imports of intermediate goods from Korea accordingly. Simply put, there is a tendency for more investment from Korea to induce more imports from Korea as well, leading to trade deficits in certain industries. However, this type of trade deficit can be characterized as supplementary to local manufacturing and job creation because it strengthens global value chain collaboration. In 2016, intermediate goods and machinery and equipment accounted for approximately two-thirds of U.S. imports from Korea. 22 This implies that industries of the two countries are closely connected through global value chains already and that imports from Korea therefore actually help strengthen the U.S. manufacturing base, create jobs for U.S. workers and contribute to U.S. exports. An example of this growing interconnectedness of investment and intra-industry trade can be found in the automobile industry. Korean companies have established more local production and manufacturing plants in the U.S. Car production in plants of Hyundai and Kia Motors in Alabama and Georgia increased by 22.3% from 2011 to 2016, resulting in a 23.8% growth in imports of automobile parts from Korea during the same period. Consequently, Korean investment has led to increased production in the U.S., and this increased production has resulted in increased U.S. imports of automobile parts from Korea. While this trend is positive for both economies, it has also contributed to the increased U.S. trade deficit with Korea. 22 Source: Korea Institute of Industrial Economy and Trade (April 2017) 11

13 A Successful Platform to Resolve Bilateral Trade Issues One of the key components of the KORUS FTA is the institutional framework established to oversee the implementation of the agreement. Through this framework, the KORUS FTA has been working as a platform to systemically resolve bilateral trade issues. Various committees and working groups have been established under the KORUS FTA to meet on a regular basis, providing both countries with the means to discuss and cooperate on issues related to the FTA, as well as develop solutions for any problems that arise. 23 Regular contact between Korean and U.S. officials within the framework of the KORUS FTA, rather than an ad-hoc approach, contributes to heading off potential implementation issues at an early stage. By holding four joint committee and 54 implementation committee meetings over the past five years, the two countries have smoothly resolved a variety of trade issues within the framework of the KORUS FTA. The KORUS FTA will continue to provide a productive and systematic forum to resolve trade issues between the two countries, as it has done so far. State-of-the-Art Trade Rules The KORUS FTA not only contributed to the improvement of market access for goods and services in both countries, but also set a high standard of trade rules for future agreements. The KORUS FTA, which is only five years old, contains the most recent and highest level of trade rules in areas such as labor, environment and IPR among the trade agreements which the U.S. has put into force. In fact, the text of the KORUS FTA has been used as a model text for many subsequent FTAs, which shows that the KORUS FTA has served as a gold standard for 21st century trade agreements. Those state-of-the-art aspects of the KORUS FTA have had positive impacts on the economic environment of Korea and the U.S. by enhancing transparency and leveling the playing field for domestic and foreign companies. For example, in Korea, rules were newly introduced or improved through the KORUS FTA to extend periods for comments when introducing new measures and provide stakeholders with more opportunities to participate. The KORUS FTA also provides a model for future U.S. agreements in the Asia-Pacific region, as it strengthens protection for IPRs, including software, music, film, video and text, and thereby sets a high standard that has an overall positive impact in raising the bar in the region.. In addition, the KORUS FTA includes the strongest labor rights protections ever negotiated by the U.S., fully incorporating the terms of the bipartisan Congressional agreement on U.S. trade policy reached in May Unlike previous FTAs the U.S. has signed, the KORUS FTA ensures that the Korean government will be held to the same level of accountability for meeting labor commitments as it is for meeting its other commitments in the agreement. Therefore, the KORUS FTA has contributed to strengthening economic competitiveness and enhancing the credibility of domestic laws and regulations, which has also had an impact on the increase of bilateral trade and investment. 23 Korea and the U.S. have operated 20 implementation committees on specific areas, including trade in goods, trade remedies, services and investment, and pharmaceuticals and medical devices. 12

14 An Essential Pillar of the U.S.-ROK Alliance Perhaps even more important than its economic aspects are the KORUS FTA s strategic ramifications. For more than 60 years, Korea and the U.S. have stood side by side in war and peace. The two countries have a strong alliance and are bound together by shared values and a deep desire to expand freedom, peace and prosperity throughout Asia and the world. Few countries better represent the promise of open markets, democracy and economic reform than Korea. Accordingly, the U.S.-ROK alliance has served as a linchpin for stability, peace and prosperity on the Korean Peninsula, in the region and increasingly around the world. The KORUS FTA helps elevate the U.S.-ROK alliance to a higher plane beyond its traditional focus toward a broader and more mature partnership, as Korea and the U.S. cement their friendship and create new opportunities for prosperity and peace for the peoples of both countries. By promoting and expanding cooperation on economic issues and enhancing economic opportunities, the KORUS FTA forms an essential pillar for the future-oriented development of the comprehensive strategic partnership. The fact that the KORUS FTA is the most recent and highest-level FTA of the U.S. to have entered into force in the Asia-Pacific symbolizes that U.S.-ROK ties are special. Moreover, the strategic ramifications of the KORUS FTA reach beyond Korea to the U.S. position in Asia and the world. It marks another critical step in the U.S. commitment and engagement in Asia, which is the most dynamic and fastest-growing region in the world. It is very important that the U.S. have a presence in Asia that reflects the dynamism and the economic success of the region. In this sense, the KORUS FTA has become a sign of the depth of the U.S. commitment to the Asia-Pacific and a key to the future role of the U.S. in the region. Conclusion As demonstrated above, the KORUS FTA as a basic framework for economic cooperation has greatly contributed to generating mutually beneficial outcomes in terms of bilateral trade, investment and job creation in both countries over the past five years since its entry into force. Although the two-fold increase in the U.S. trade deficit in goods with Korea coincided with the implementation of the KORUS FTA, our analysis concludes that the primary cause of the trade deficit was not the FTA itself, but a more complicated combination of macro-economic circumstances as well as micro-economic, industry-specific factors in automobiles, IT and steel, in particular. These sectors, which explain most of the trade deficit in goods, were not affected by tariff reduction under the KORUS FTA because their tariff rates were zero already even before the FTA or remained unchanged. As the National Trade Estimate Report on Foreign Trade Barriers noted at the end of March this year, since the KORUS FTA took effect, bilateral trade in goods and services has increased, creating new opportunities for American companies to access a new market, and Korea s investment environment has improved, particularly with regard to IPRs and services, which has facilitated the growing bilateral economic partnership between the two countries. With the KORUS FTA at the core, the Korea-U.S. economic partnership is expected to further develop, strengthen and become more balanced going forward in the following manner. 13

15 First, both countries can continue to expand bilateral trade in goods and services through faithful implementation of the KORUS FTA. In fact, the KORUS FTA has been working as an effective and useful mechanism by which both countries can work together to resolve bilateral trade issues. Through a total of 54 meetings of the KORUS FTA implementation committees over the past five years, 24 Korea and the U.S. have smoothly managed and resolved a wide range of trade issues. Second, bilateral trade will become more balanced when Korea begins importing American energy resources, such as shale gas, under long-term contracts starting in 2017, as planned. Moreover, as a military ally and importer of American defense goods, Korea will continue to engage in various cooperation projects, such as technical cooperation and joint production. Lastly, Korea s investment in the U.S. is also expected to continuously increase, particularly in the manufacturing sector with the KORUS FTA framework at its core. Korean companies have accelerated their entry into the American market, and many of them are planning large-scale investments in the future. These Korean investments will continue to contribute to strengthening the manufacturing industrial base and creating jobs in the U.S., providing win-win outcomes for both countries. *** 14

16 Appendix: State-Level Benefits < Figure 1. Export Growth Rate by State before and after the KORUS FTA > 15

17 < Figure 2. Value of Exports to Korea by State in 2016 > 16

18 < Figure 3. Growth Rate of Major Products Exported to Korea by State > 17