Historically, the United States and South Korea have had a strong military alliance, and moved to expand economic relations through the KOR-US Free Trade Agreement (FTA), which entered into force in 2012. An FTA is an economic agreement between two nations setting expectations and obligations in terms of the exchange of goods and services, protection of investors, etc. For the US, the aim is to protect US economic interests abroad and to aid US exports. Key provisions in the FTA include:

• Consumer and industrial products became duty free and 95% would be expected to be duty free within three years.
• Textiles and apparel—“yarn forward” treatment allowing for apparel that uses materials from US/SK qualifies for preferential treatment.
• Trade remedies (actions taken in response to import surges, fair value sales, etc.) which allowed for US to exempt SK imports if it did not endanger the US domestic industry, and established a third-party committee— Medicines and Medical Devices Committee— to review government reimbursements and pricing on pharmaceuticals and medical devices. 
• Some provisions for digital trade, but they are less extensive than other agreements, and some have called for updates to this specific provision. 

The KORUS Free Trade Agreement is the United States’ second-largest FTA by trade-flows, only surpassed by NAFTA, now called the United States-Mexico-Canada Agreement (USMCA). US-SK exports were $80.5 billion, imports were $88.1 billion, totalling an estimated $168.6 billion (2019) in trade flows. 

Challenges to the Free Trade Agreement

When negotiating the final agreement, the beef and auto sectors were two major sticking points. South Korea had banned American beef after the outbreak of mad-cow disease in 2003, and there was significant debate about lifting that restriction. The issue of beef was perceived as a public health issue and became highly politicized. In the initial 2007 agreement, beef was avoided entirely because of its sensitive nature in South Korea, but eventually restrictions were lifted on boneless beef under 30 months old. On the US side, the auto industry had concerns over the rising imports and a weakening domestic market—General Motors, Ford, and Chrysler sales in 2007 fell 7.3% while U.S. sales of foreign brands (U.S.-based production plus imports) rose about 3%. Because of these conflicts, President Bush did not submit legislation to ratify the agreement 

The Obama Administration took office focused on improving terms for the US auto industry in the FTA, leading to a supplemental trade agreement. The new terms expanded on Korean safety standards and allowed for 25,000 cars per US automaker to be imported into Korea as long as they meet US federal safety standards, and more leniency for small-volume importers (up to 4500 vehicles) in terms of environmental standards. The letter also specifies under Section A that there would be a reduction in duties (taxes), and in Section B desires more transparency from South Korea in preventing delays and barriers to trade while establishing an early-warning system. The beef issue was resolved when South Korea eliminated its 40 percent tariff, which was projected to save $1,300 per ton of beef imported to Korea and would approximately total $90 million annually for US beef producers at 2010 sales levels.

Recent Developments and Critiques

According to the Office of the United States Trade Representative, as of 2019, South Korea is the US’ 6th largest goods trading partner with $134.0 billion in total (two way) goods trade during 2019, and the US is South Korea’s 2nd largest trading partner. However, under the Trump Administration, the US threatened to leave the agreement, leading to increased economic tension between the two countries. Trump blamed Korea for an increase in trade deficit, and wanted Korea to reduce policies which disadvantage American firms so that trade would be more balanced, with the current trade deficit at 29 billion (2021). He also raised concerns over non-tariff barriers (NTBs) in the steel and auto industry that disadvantaged American markets by protecting Korean manufacturers. Non-tariff barriers are restrictions in trade that arise due to sanctions, domestic laws, quotas, etc. and are outside the agreed upon terms of an FTA. Minor revisions were made to the FTA in 2019 to address these concerns. 

• The previous limit of 25,000 cars per US automaker imported by Korea was raised to 50,000 cars.
• The 25% tariff on Korean trucks that was supposed to expire in January 2021 was extended to 2041.
• The US restricted imports on steel and washing machines (Section 201 and 232). 
• Minor changes were made to pharmaceuticals, customs, and investor-state dispute settlement.

When Trump threatened to leave the agreement in 2017 due to the deficit, 2017 (Jan-May) data showed that US merchandise exports to Korea were up 23% year over year and and US imports from Korea were down 2%. It was suggested that trade diversion (where imports shift from lower cost nations to higher cost nations, something that can follow free trade agreements) may have contributed to the trade deficit, but ended up leaving the global trade balance largely unchanged in the long term. From 2012, the date of implementation, the US trade deficit in goods with Korea increased by 75% from $13.2 billion to $23.1 billion in 2017. 

The rising trade deficit has led to concerns over the FTA, but many economists argue that the balance of trade is not an accurate way to measure the benefits of a trade agreement. For example, high US imports indicate consumers have access to products at lower prices, or better-quality goods at similar prices. Currency value also plays a major role in trade deficits; when the dollar is strong American consumers can afford to buy more imported goods, but American goods on foreign markets are comparatively more expensive. 

Future Developments

During a May 2021 summit, President Biden and President Moon Jae-in announced plans for greater cooperation to address trade and industry developments, but the Trump-era restrictions remained in place. The Korean government urged the Biden administration to ease the steel restrictions, but they remain in place as of July, 2022. South Korea recently elected a new president, so the future of the FTA could change. In their joint statement, both leaders reaffirmed their support for the FTA and discussed close cooperation on foreign exchange market developments. It is important to keep an eye on the renewable energy, semiconductor, and auto industries for the future, especially considering Biden’s $5 billion investment in an electric vehicle plant. 

Reopening the FTA discussion would affect current steel restrictions and open conversations about the auto industry again, but also provide an opportunity to fill in the gaps of the digital industry which currently exist in the FTA, and add updated provisions about climate change. President Biden also recently launched the Indo-Pacific Economic Framework for Prosperity (IPEF), which includes South Korea, that aims to address supply-chain issues, climate change, business ethics, and more. As the IPEF develops and more details are finalized, it may create more opportunities for cooperation between the US and South Korea.