South Korea trade deal produces bleak first-year results for U.S.

McClatchy Washington BureauMay 22, 2013 

— More than a year after it took effect, a highly touted trade deal with South Korea has failed to produce as expected for the U.S.: Exports are down, imports are up and the trade deficit with the Asian economic powerhouse has ballooned.

In Washington state, where global trade is now linked to 2 of every 5 jobs, trade backers are happy: Exports of aircraft and parts to Korea rose by more than 75 percent last year, and Koreans are gobbling up more of the state’s prized cherries and apples.

But across the nation, the picture looks far bleaker.

Overall, U.S. exports to Korea from March 2012 to this February fell to $42 billion, a 6 percent decline from the previous one-year period, according to the Office of the U.S. Trade Representative. During the same time, Korean imports increased by 4 percent.

The U.S. trade deficit with Korea went from $13.2 billion at the end of 2011 to nearly $16.6 billion at the end of last year, according to the U.S. Census Bureau.

Boosters of the pact say it’s way too soon to know how it will pan out.

“To judge it after a year and say it’s a success or failure is a little bit premature, certainly,” said Eric Schinfeld, the president of the Washington Council on International Trade, in Seattle.

The deal with South Korea is one of three free-trade agreements, along with Colombia and Panama, that Congress passed in 2011 at the urging of President Barack Obama. The Korean deal, by far the largest and offering U.S. businesses the most potential in selling more goods overseas, took effect on March 15 of last year.

On Capitol Hill, some are sounding the alarms.

Democratic Sen. Elizabeth Warren of Massachusetts raised the issue before the Senate Banking, Housing and Urban Affairs Committee earlier this month, during a confirmation hearing for Export-Import Bank President Fred Hochberg. She told Hochberg that his job is to increase exports and reduce the trade deficit.

“Just based on the math, something is not working very well for the United States on the Korea free-trade agreement, and it seems to be working at cross purposes with what it is that you’re trying to accomplish,” she told Hochberg. Warren based her thoughts on her own analysis, looking at data from February 2012 through March of this year, concluding that exports to Korea fell by 5 percent, imports increased by 17 percent and the trade deficit rose “by a staggering 170 percent.”

Opponents hope that unhappiness with the early results of the Korean trade deal will lead more members of Congress to look skeptically at free-trade proposals, making it more difficult for Obama to win approval for his Trans-Pacific Partnership. That proposed pact, which is being negotiated by 11 nations, would seek to expand trade throughout the Pacific Rim. It promises to be the largest trade deal Congress has ever considered.

“It’s critical that Congress take note of that and demand changes,” said Arthur Stamoulis, the executive director of the Citizens Trade Campaign, a coalition of environmental, farm and consumer groups that’s a leading opponent of the Korea and Pacific Rim trade pacts.

Noting that the Obama administration has been busy touting the South Korea deal, most recently during a visit to Washington, D.C., by South Korean President Park Geun-hye two weeks ago, Stamoulis said backers of the pact should take a hard look at the statistics.

“I think folks in the Obama administration either aren’t looking at the numbers or they’re intentionally misleading folks,” he said. “Because the data is clear: This is a pact that has undercut the president’s goals for export growth and job creation.”

In response, Schinfeld said rising imports weren’t necessarily bad and didn’t provide evidence that a trade deal wasn’t working. Instead, he said, they can merely reflect the fact that consumer demand is increasing and Americans are buying more products.

Assistant U.S. Trade Representative Carol Guthrie cited a handful of American industries that had particularly strong growth in exports to Korea last year, including passenger vehicles (48 percent), pharmaceutical drugs (29 percent), fresh fruits (46 percent), tree nuts (38 percent), and wine (57 percent).

She said that much of the decline in exports to Korea came because of a drop in just one product: corn. She noted that corn exports were down across the globe due to a major drought last year in corn-growing regions of the United States.

And she said that macroeconomic effects could have a big role in shaping trade statistics.

“If a country is experiencing tough economic times and low growth, that is going to result in lower demand, lower consumption and lower imports,” she said. “And Korea experienced much slower-than-normal economic growth in 2012.”

Jeffrey Bergstrand, a professor of finance and an expert on international trade at Notre Dame’s Mendoza College of Business, said Japan was still fighting a recession and that economic growth in China had slowed.

“That weighs heavily upon the Korean economy,” he said.

Income fluctuations can greatly affect trade statistics in a single year, he said, and it’s impossible to know how well-positioned firms were to take advantage of the new agreement. He estimated that it takes 10 to 15 years to fully understand the benefits of a new trade pact.

“It’s almost ridiculous to look after one year at the impact. It’s not revealing of the long-term impacts and benefits of these agreements,” Bergstrand said.

At a news conference with the Korean president on May 7, Obama said the historic trade agreement already had yielded benefits for both countries, predicting that it ultimately would boost U.S. exports by $10 billion, though he didn’t give a timeline. He said U.S. businesses were exporting more manufactured goods, services and agricultural products to Korea, and he highlighted the performance of U.S. automakers.

In Washington state, often called the nation’s most trade-dependent state, the value of exports to Korea rose from $3.26 billion in 2011 to $3.38 billion last year, an increase of less than 4 percent. Korea is the state’s fifth-largest trading partner, behind China, Japan, Canada and the United Arab Emirates.

Schinfeld said Washington state was bound to capitalize on the deal even more, as it would take at least five years before tariffs were phased out and all the provisions of the agreement went into effect.

Among the biggest winners so far are producers of cherries, with exports rising nationally by 88 percent last year. That’s been particularly welcome news in Washington state, the top-ranked state in the production of sweet cherries.

One key reason: The agreement resulted in the immediate scrapping of a 24 percent tariff on cherries, making them cheaper for Koreans to buy.

“The Korean market has been good. They’ve been great customers,” said Norm Gutzwiler, 66, of Wenatchee, Wash., who owns a 100-acre orchard of sweet cherries and has been in the cherry business all his life.

Saying that Koreans have “paid their bills well,” he’s hoping to export even more of his fruit to them in coming years.

“It’s been profitable for us and, as long as their economy is sound, we think it will continue,” Gutzwiler said.

Email: rhotakainen@mcclatchydc.com; Twitter: @HotakainenRob

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