Asia’s Heightened Jitters Over NAFTA Risks Spilling Over

From the moment that possibilities of a U.S. withdrawal from NAFTA were voiced on the presidential campaign trail last year, tensions rose well beyond Canada and Mexico about how Washington might change the global trading landscape.

As the Trump administration now mulls over how it might renegotiate the North Atlantic Free Trade Agreement, there is ever-growing concern that the White House will reassess or even scrap other deals too.

Unlike NAFTA, however, which has been in place for over two decades and could potentially benefit from updates that would reflect changes in the global marketplace since then, there are fears that renegotiating or eliminating newer deals could do more harm than good across the board, not least for U.S. consumers.

South Korea is undoubtedly the most anxious about the outcome of NAFTA as a non-member country, given the threats its own bilateral deal with Washington is now facing.

US-Korea bilateral trade deal

The US-Korea bilateral free agreement came into effect in 2012 amid much fanfare, heralded as a gold standard for future trade deals. It was seen as particularly effective in addressing non-tariff barrier sector issues that have not been included in most trade agreements to date, including financial services and data processing.

In fact, at first blush, KORUS should be exactly the kind of trade deal that Trump would support, as a bilateral deal that protects the future of the U.S. services sector. Yet five years on, some numbers indicate that KORUS has not succeeded in reducing the U.S. trade deficit with Korea.

In fact, the U.S. deficit in goods with Korea continues despite the FTA, with the deficit reaching $27.7 billion in 2016.

As a result, Trump has repeatedly declared that KORUS is a “terrible deal…a deal that should have never been made,” and argued as recently as late April that the deal could either be renegotiated or terminated altogether.

Upside to the bilateral FTA

On the other hand, the United States has actually seen a trade surplus in the services sector with Korea, as it has with most other countries, to the tune of $10.7 billion last year.

That surplus is in no small part due to the trade deal that has increased the allure of the Korean market to U.S. services providers.

It has done so by strengthening the protection of intellectual property rights, opening doors to U.S. legal services and by allowing U.S. financial services providers to process data in the country and opening up hitherto closed sectors such as the telecommunications industry.

Another upside to the bilateral FTA is the fact that more Korean companies have invested in the United States as a result.

There are over 45,000 Americans now employed by Korean companies based in the United States, often for higher wages than their U.S. counterparts, which undoubtedly is in line with Trump’s own push for trade relations that would create more high-quality jobs for American workers.

KORUS does not need renegotiation

Much has changed in the global economy since NAFTA came into force in 1994, not least the advent of the internet and the flourishing of online commerce.

As a result, the trade deal between Canada, Mexico, and the United States could potentially benefit from updates that would reflect the needs of 21st century industries, especially in the services sector in which the United States dominates worldwide.

In fact, the reasoning behind the Trans-Pacific Partnership agreement had been that the higher standards set in the services sector by the TPP would supplant those established by NAFTA and effectively eliminate the need to renegotiate NAFTA per se.

In contrast, KORUS is a much more recent trade pact that has taken the needs of the internet economy into account, so there is no reason from a bilateral perspective for any significant renegotiation of the deal.

At the same time, Seoul finds itself at a particularly vulnerable time both politically and economically, as it will hold a presidential election on May 9 to elect a successor to impeached former leader Park Geun-hye.

Maintaining a good rapport with South Korea

The new president will be sworn in the following day and will be under pressure not only to deal with North Korea’s nuclear ambitions, but also to deal with the corruption scandals that have led to President Park’s downfall and the imprisonment of the Samsung business empire’s heir, among other major challenges.

It would certainly be in the United States’s national interest to ensure that the new Korean government is stable and remains a strong U.S. ally in light of the growing challenges facing Asia.

Certainly, a stable and economically strong Korea would be key to increasing Korean imports of U.S. goods as well as services.

Equally important is the fact that overturning the KORUS deal would certainly hurt not only U.S.-Korea trade relations, but more broadly, diplomatic relations between the two countries.

Bearing in mind that over 60% of the total U.S. trade deficit in 2016 of $501 billion is with China, the single biggest goal of Washington on the trade front should be to address how to live the playing field with China head-on.

Protectionist policies will only isolate US

Certainly, both services providers and manufacturers in the United States could benefit from trade rules that would make it as easy for U.S. businesses to operate in China as it is for Chinese companies to trade with the United States.

By backing down from tackling the biggest trade challenge and focusing instead on the lesser issues, Washington risks creating new diplomatic problems without reducing the trade deficit significantly.

Changing or scrapping trade deals that only increases tariffs would ultimately hurt U.S. consumers and also undermine the U.S. position as a leading economic power.

As members of the TPP consider the possibility of moving forward with the multinational trade deal even without the United States, protectionist policies driven by economic nationalism would only isolate Washington from the global trade arena even further which in turn would hurt U.S. growth prospects.

Editor’s note: This essay was originally published in The Diplomat.