South Korea Remains a Crucial U.S. Ally

(Bloomberg View) -- Two critical agreements between the U.S. and South Korea will be renegotiated in 2018: a much-discussed free-trade deal and an under-the-radar arrangement for sharing military costs. Both sets of talks will shape the relationship between the two countries for years to come. They will also test whether the centripetal forces of compromise and collaboration are greater than the centrifugal forces of nationalism and protectionism.

Under President Donald Trump, the U.S. has initiated a review of the Korea-U.S. Free Trade Agreement, or Korus. A new round of talks on the deal will be held this week in Seoul, with a goal of establishing "fair and reciprocal trade," according to the U.S. Trade Representative. It should be noted that Congress is largely in favor of Korus and the U.S. Chamber of Commerce opposes withdrawing from it "in the strongest possible terms."

The Trump administration is pushing for easier access to Korea's automobile market and a reduction in non-tariff barriers to trade. Korea's negotiators hope to keep the agreement largely intact, and will resist pressure to make further concessions on agricultural imports. Both sides expect difficult negotiations, especially following the tariffs and quotas that the U.S. recently imposed on solar panels and washing machines -- actions that South Korea immediately challenged at the World Trade Organization. 

One complication is that Trump's preferred metric for judging economic relationships -- the bilateral balance in goods trade -- is overly narrow. It's true that the U.S. deficit in goods trade with Korea widened after Korus went into effect in 2012. But the U.S. also maintained a $7.8 billion surplus in services trade with Seoul in the first three quarters of 2017. Korea is a top customer for American military equipment, and its annual foreign direct investment into the U.S. has doubled since Korus came online. South Korean companies now employ more than 75,000 Americans, with LG Electronics Inc., Hankook Tire Co. and Samsung Electronics Co. all making big investments in the U.S. in recent years.

Even by Trump's own criteria, the protectionist argument is weakening. The bilateral deficit with Korea has narrowed significantly. There's a good chance that this year it will dip below $20 billion, a benchmark the U.S. Treasury Department uses to judge whether a country is manipulating its exchange rate to favor its exports. Even if Korea-U.S. trade were in balance in 2017, moreover, the U.S. would still have had a $700 billion global trade deficit. The big picture is largely influenced by macroeconomics -- which is what should guide a common-sense reexamination of Korus. 

The second crucial agreement on the docket this year involves cost-sharing for the 28,500 U.S. troops stationed in South Korea. So-called special-measures agreements have served as the basis for the shared burden of defending the Korean peninsula since 1991. The current agreement expires at the end of this year, and Seoul has already set up a task force and named a lead negotiator to prepare for talks.

Trump strongly disparaged this arrangement on the campaign trail. But he may have changed his mind after seeing the burden shouldered by South Korea firsthand. On a state visit in November, Trump toured the new U.S. base in Pyeongtaek (the largest overseas U.S. military base), for which the South Korean government provided in excess of $10 billion -- more than 90 percent of the construction costs.

The fact is that South Korea has significantly stepped up its military contributions in recent years. It now pays more than 50 percent of America's annual non-personnel costs, equivalent to $870 million when the current agreement was reached in 2014. That's an almost 500 percent increase from 1991. Moreover, Korea's total defense commitment stood at 2.3 percent of its gross domestic product in 2016, greater than the NATO benchmark and more than that of the U.K. and Japan. President Moon Jae-in has committed to increasing this expenditure to 2.9 percent of GDP by the end of his term. Korea has also agreed to deploy a U.S. missile-defense system on its soil -- despite China's strong opposition and economic retaliation.

South Korea isn't shirking its responsibilities, in other words. It has shown itself to be a reliable partner, both economically and militarily. Especially against the backdrop of North Korea's nuclear provocations, there is little benefit to undermining this mutually beneficial alliance -- and every reason to find agreement on both these issues.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Thomas Byrne is president of the nonpartisan Korea Society and formerly the regional manager for sovereign risk in Asia-Pacific and the Middle East for Moody’s Investors Service.

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