Obama’s South Korea Trade Deal Lacks Mechanism to Assure Balance

http://www.reuters.com/article/idUSTRE6B25GJ20101204

As reported this weekend, Obama has concluded a trade deal with South Korea.  This is the deal that left him empty-handed when he returned from his recent Asian trip, with the South Koreans refusing to allow more American autos to enter their market than what had been negotiated by the Bush administration.  To his credit, the deal quadruples the number of American cars allowed from what the Bush administration had negotiated.  It also allows the U.S. to keep in place a token 2.5% tariff on Korean autos for a longer period of time.  And it opens the door to more beef exports.  According to Obama, this deal will create 70,000 additional jobs supplying these exports. 

Or will it?  While limiting U.S. auto exports to 25,000 per American automaker, there is no corresponding limit on Korean exports to the U.S.  In addition, what little tariff the U.S. imposes on Korean autos will eventually be eliminated, along with the significant tariff it currently has in place on Korean trucks.   And there is no definition of what constitutes an “American” car.  There is a good likelihood that the quotas will be met by Hyundais assembled in the U.S. from imported Korean parts, greatly diminishing any impact on improving the balance of trade with Korea. 

The biggest problem with the deal is that it fails to account for the huge disparity in per capita consumption of autos between the U.S. and South Korea.  By combining the U.S. and Korean auto markets into one free trade market, the Koreans get to share equally in the work of manufacturing those autos.  But with the huge disparity in consumption, American auto makers don’t get access to an equivalent market.  Without some mechanism to assure a balance, the net result is sure to be a net loss of jobs in auto manufacturing.  It is precisely this kind of export-focused trade deal, blind to the conseqences of imports that drown out the effect of the imports, that has exploded our trade deficit and driven the U.S. into financial ruin. 

Our last hope of avoiding these consequences lies with Congress, who now must ratify the deal.  Republican Senator Mitch McConnell yesterday, on Meet the Press, was already eagerly endorsing the deal  and predicted that his Republican colleagues would do the same.  No doubt.  They’d have just as eagerly ratified the deal struck by Bush, even though it was even worse.  Our only hope lies with the Democrats who fear a backlash from voters over yet another job-killing trade deal.

Obama has said that this will improve our balance of trade with Korea by $11 billion per year by opening the door to more auto exports (and some beef exports).  Korea will now allow up to 25,000 cars to be imported from each American automaker.  Let’s do some math.  Giving Korea the benefit of the doubt and assuming that they’ll import Fords, GMs and Chryslers, this means that they’ll allow up to 75,000 vehicles.   Assuming an average vehicle value of $20,000, that many vehicles would account for $1.5 billion in exports – a far cry from $11 billion.  Also, assuming that two thirds of that value is labor and assuming that an average job is worth $50,000, that’s only 20,000 jobs.  There’s no way that beef exports will make up the difference.

Besides, we already export the equivalent of about 40,000 vehicles per year to Korea.  (While that may sound like a lot, it pales in comparison to imports of about 560,000 cars cars from Korea per year.)  So we’re really only gaining another 35,000 vehicle exports.  How much will that be offset by increased car exports when we lower our tariffs?  And how much of our truck market will be lost when our tariffs on Korean trucks expire in ten years.  Has anyone noticed that, in spite of hundreds of thousands of Hyundais and Kias on the road, you don’t see a single Korean pickup truck?  The 25% tariff is the reason why.  Protectionism works.  Tariffs work.

Here’s my prediction:  instead of improving our balance of trade with Korea, it will worsen.  From today’s trade deficit of about $12 billion per year, our trade deficit with Korea will steadily worsen to as much as $50 billion per year.   And I won’t forget this prediction or Obama’s claims.  Beginning with ratification of this treaty (if it’s ratified), I will begin tracking our deficit with Korea, and will especially monitor the deficit in cars (exhibit 18 of the Bureau of Economic Analysis monthly report of U.S. International Trade in Goods and Services.

I’m sure the President thinks he’s made a good deal for the American worker.  But there’s simply no way that a free trade deal with a badly overpopulated, export-dependent nation like Korea, much less one that caps American exports without capping Korean exports at the same level, has any chance of doing anything other than driving up our trade deficit and killing more American jobs.

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2 Responses to Obama’s South Korea Trade Deal Lacks Mechanism to Assure Balance

  1. Ken Hoop says:

    Krugman today in his column says the deal will not work as sold to the public.

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