On March 28, the United States and South Korea announced that they had reached an agreement in principle on amendments and modifications to the U.S.-Republic of Korea Free Trade Agreement (KORUS FTA). They also agreed on terms for a country exemption for Korea from U.S. tariffs imposed by the president on steel imports under Section 232 of the Trade Expansion Act of 1962. The KORUS FTA discussions began under threats by the president to terminate the Agreement and were brought to a quick conclusion, at least in part, due to Korea’s desire for an exclusion from the of steel and aluminum tariffs. This post examines the process used for the negotiations and the outcome, which could provide a precedent for renegotiations of other FTAs.
In the KORUS FTA negotiations, the administration did not use Trade Promotion Authority (TPA), which would have required setting out the objectives of the negotiations and following congressionally mandated timetables and consultations in exchange for an up-or-down vote by the Congress on the amended agreement. Instead, it relied on the amendment authority in the Agreement and its Joint Committee.
The Joint Committee, co-chaired by the U.S. Trade Representative (USTR) and the Minister for Trade of Korea or their designees, is charged, inter alia, with supervising the implementation of the Agreement and may consider amendments to it or modifications of its commitments. The KORUS FTA specifically authorizes the parties to agree to amendments to the Agreement, which enter into force after the parties have completed their respective legal procedures. These are provisions typically included in FTAs negotiated by the U.S.
In accordance with this process, USTR Robert Lighthizer in July 2017, at the direction of the president, requested a special session of the Joint Committee “to consider matters affecting the operation of the KORUS FTA, including amendments and modifications to resolve several problems regarding market access in Korea for U.S. exports and, most importantly, to address the significant trade imbalance”. The U.S. and Korea convened two specials sessions of the Joint Committee in August and October.
The two sides began negotiations on January 5, 2018 and in less than three months (on March 28) announced an agreement in principle. A USTR fact sheet described the highlights of the agreement, most of which involve U.S. auto exports to Korea:
- The phase out of the U.S. tariff of 25% on trucks will be extended by 20 years, from 2021 until 2041.
- Korea will double the number of U.S. autos, meeting U.S. rather than Korean safety standards, that it will import – from 25,000 cars to 50,000 cars per manufacturer per year. However, according to the Washington Trade Daily this commitment may have limited effect: since the KORUS FTA’s implementation in 2012, no U.S. auto manufacturer has reached the 25,000 cap; in 2017, Ford Motor Company and General Motors each shipped less than 10,000 vehicles to Korea.
- To harmonize testing requirements, U.S. gasoline engine vehicles exported to Korea can comply with Korea’s emission standards by using the same tests they conduct to show compliance with U.S. regulations.
- Korea will recognize U.S. standards for auto parts that are needed to service U.S. vehicles, and reduce burdensome labeling requirements for auto parts.
- Korea will expand the “eco-credits” available to help meet fuel economy and greenhouse gas requirements under current regulations and ensure that future fuel economy targets will take U.S. regulations into account and continue to include more lenient targets for small volume manufacturers.
- Regarding customs improvements, Korea agreed to follow principles for verifying the origin of exports and establish a working group to monitor and address future issues.
- On pharmaceutical reimbursements, Korea committed to amend its Premium Pricing Policy for Global Innovative Drugs within 2018 to make it consistent with FTA commitments to ensure non-discriminatory and fair treatment for U.S. pharmaceutical exports.
According to Inside U.S. Trade, the two countries also agreed to clarify investor-state dispute settlement rules to deter frivolous claims and prevent the filing of parallel claims. The U.S. also committed to follow existing rules for trade remedy investigations involving Korean companies.
The U.S. and Korea are also finalizing a currency agreement, with discussions led by the Treasury Department and Korea’s Ministry of Strategy and Finance. According to USTR, the currency agreement will include two elements: a prohibition on devaluation of currency for competitive reasons and strong commitments on transparency and accountability. However, the provisions will not be enforceable.
The amendments of the KORUS FTA are subject to requirements in the implementing act enacted by Congress in approving the original Agreement. That requires the president to obtain advice regarding proposed actions from statutorily mandated advisory committees and the U.S. International Trade Commission (ITC). The administration must also allow for a 60-day consultation period with Congress before implementation of amendments.
Responding to a request from the USTR, the ITC on April 12 launched an investigation concerning proposed modifications to the KORUS FTA regarding the staging of customs duties for certain motor vehicles. The ITC expects to provide its advice on “the probable economic effect of the proposed U.S.-Korea FTA staging of customs duty modifications on U.S. trade under the Agreement and on domestic producers of the affected articles” by June 1.
Another element of the agreement addressed the steel and aluminum tariffs that the president imposed based on national security determinations under Section 232 of the Trade Expansion Act of 1962. Korea was given a temporary exemption from the tariffs until May 1. The new agreement makes that exemption permanent for steel. In exchange for Korea’s commitments to improve access for U.S. autos and auto parts to its market, the U.S. agreed to exempt Korea from the 25% tariffs on steel. Instead, Korean steel imports into the U.S. will be subject to a product-specific quota equivalent to 70% of the average annual exports of steel products over a three-year period (2015-17). This will amount to a 30% reduction in Korea’s steel exports to the U.S. Korea reportedly accepted the 10% tariff on aluminum.
The administration’s approach to addressing issues with the KORUS FTA through its built-in amendment process, rather than TPA, could be used in negotiating changes to other FTAs. However, that approach limits modifications to those within the president’s authority, such as revisions of tariffs. It could not be used to seek modifications that would require changes to U.S. law.
Jean Heilman Grier
April 17, 2018