For years, the U.S. market has been much more open to Korean goods than Korea was to U.S. goods. The U.S.-Korea Free Trade Agreement that went into effect in 2012 was supposed to change this. But that hasn’t been the case. And President Trump agrees. In a recent interview he told Reuters, “It’s a horrible deal, and we are going to renegotiate that deal or terminate it.” The good news is that South Korea’s new president, Moon Jae-in, could usher in the reforms that would make the deal work.
While bilateral trade between the two countries topped $112 billion last year, the U.S. continues to have a trade deficit with South Korea. The U.S. goods trade deficit with Korea doubled four years into the agreement. U.S. exports declined 10 percent ($4.5 billion) and imports from Korea increased 18 percent ($10.8 billion). While some would stop short summing up the KORUS FTA as “horrible,” they are indicative of the inherently lopsided structure of Korea’s economy.
The South Korean economy is distorted by the chaebols, sprawling, family-run business conglomerates that rule the economy. Samsung alone comprises nearly one-fifth of the national GDP, with a footprint in everything from phones to construction to financial services.
The success of the Korean economy is reliant on the success of the chaebols so it would be naïve to think the Korean government can afford them the same measure of detachment that the U.S. can with large companies here. But this level of government interference in the private economy is the reason why corruption and collusion have been so common in Korea for decades. It makes truly free trade hard to accomplish.
The chaebols system was a frequent area of contention and distrust during the negotiation of the FTA. However, both sides wanted the agreement badly enough that the role of chaebols, along with special provisions on rice, beef and other items, were papered over. But this year, Samsung’s alleged payments to secure favorable government treatment led to the impeachment and ouster of President Park Geun-hye and the arrest and indictment of the heir apparent of Samsung, Lee Jae-yong, thus paving the way for President Moon, who vowed on the campaign trail to fight corruption. A similar scandal led to the indictment of Lotte Group Chairman Shin Dong-bin.
The shadowy power of the chaebols has long represented a built-in advantage for Korean companies – that’s why Americans, even more so than Koreans, should welcome the fact that President Moon wants to do something about the chaebols. Checking their power with the power of law is long overdue, and something that U.S. companies and workers should look forward to.
President Trump can and should hold Moon to his word on this. Trump has already ended U.S. participation in the Trans-Pacific Partnership Agreement and vowed to re-open KORUS to ensure it more clearly benefits American workers and companies. And the shakeups and the uncertain futures at Samsung and the other chaebols are good news for the negotiating power that the Trump administration brings to the table.
The United States and South Korea have had a deep economic and security relationship for nearly 70 years, and it almost certain to continue. However, as the chaebols continue to dominate and tensions with North Korea increase, the countries are entering a period of uncertainty. Moon’s inclination to seek reconciliation and engagement with a North Korea, despite Kim Jong-un’s brazen threats, contrasts greatly with the Trump administration’s no-nonsense stance. On the other hand, Moon’s stated goal to check the outsized power of the chaebols is a chance for him to engage the United States on fairer terms.
Charles Sauer is president of the Market Institute.
