While Mexico and Canada have been waiting, the first trade deal of the Trump presidency has been worked out in South Korea.
On Tuesday, the United States – South Korea trade agreement first established in 2012 was officially revised. The negotiations for this deal took a few months, and some economists have stated that the deal does not appear to have changed much.
Here are some of the primary impacts of the new trade agreement:
Three Deals in One
Experts have stated that the new trade agreement is really three agreements in one, focused on steel, currency, and the KORUS pact. This deal was aimed at making the prior deal feel more fair to the United States, as experts had believed that the deal in 2012 was slanted towards South Korea. Trade agreements are important both economically and politically, as they establish a relationship between countries.
Currency Clause
One of the unique components to the US – South Korea trade agreement is its currency clause. Both countries have agreed that they will not attempt to devalue one another’s currency in order to get better value on their trading. Though this is something to keep an eye on for the foreign exchange market, the question remains how this would be enforced. Experts call the measure “toothless,” however, and it’s yet to be determined how the measure would be enforced. It is simply an agreement between the two countries, outside of the official content of the trade agreement.
Steel and Aluminum Exports
South Korea will limit their steel exports to the United States to a cap of 70 percent of what they currently export. This falls in line with the Trump Administration’s encouragement of domestic steel production. Once the cap has been hit, South Korea will not be able to export any more steel that year. In turn, South Korea isn’t going to have to follow the tariffs he established on other countries for steel. They will need to pay a 10 percent tax on any aluminum exports they send over.
Many of the moves taken by the Trump administration have had an eye on encouraging American steel companies, which is something that investors may want to take into consideration. Fees have been waived for some of the countries involved in steel-related tariffs, but it remains to be seen how further trade deals will be worked out.
Auto Exports
Previously, each American auto maker was only allowed to export 25,000 vehicles to South Korea. The revised deal allows the United States to export twice as many vehicles — 50,000 — to South Korea in a move that is designed to encourage the domestic automobile industry. All of the US vehicles will need to comply with South Korean safety standards, which have historically been cited as being too rigorous by American automobile manufacturers.
Despite the apparent value of this change, it’s unlikely to make any substantial difference unless the United States automobile export industry changes significantly. None of the US automotive manufacturers have been able to send more than 11,000 vehicles to South Korea regardless, falling well short of the new cap and not even approaching the prior cap. South Korea itself has a fairly strong automotive industry, and little demand for foreign imports.
However, defenders of the South Korea trade agreement have pointed out that by decreasing some of the regulations regarding automobile exports into Korea, there could potentially be a larger market there than previously explored. If so, this improved cap could lead to better results long-term, but that is assuming that automobile exports experience a significant increase.
Ultimately, the South Korea trade agreement does not appear to be changing very much about imports and exports between the two countries. The most significant portion of the trade deal served to limit the amount of steel coming in from South Korea. However, the new changes do indicate the direction in which the administration is heading by firmly focusing on the steel and automotive industries as well as currency exchange.
There are still numerous trade agreements that need to be hashed out, and these will likely have widespread consequences for the domestic and international markets.
Regards,
Ethan Warrick
Editor
Wealth Authority
