KORUS TERMINATION NOTICE AND ACTION POSSIBLE

 

 

  • Press reports, and Hill and Administration officials, are suggesting that the President could invoke a provision to terminate the S./South Korea free trade agreement (aka KORUS) as early as Monday.
  • President Trump is reportedly frustrated over the pace of discussions with the South Koreans pursuant to consultations that the U.S. initiated in July under Article 22.2 of the KORUS.
    • The first session of those consultations took place August 22, after which the U.S. Trade Representative (USTR) continued to express frustration that the KORUS, in its current form, does not benefit the United States and reasserted concerns over the size of the bilateral trade deficit.
    • Press reports indicate that part of the trade deficit reduction strategy involved a U.S. proposal for South Korea to immediately reduce agricultural tariffs, many of which are still subject to phase outs because of Korean agricultural sensitivities.
    • The South Koreans are reported to have instead proposed a joint study on the causes and consequences of the deficit.
  • Late last week, the White House began preparing the documents to officially notify Korea under Section 24.5 to provide a six month notice that the U.S. wishes to terminate KORUS.
    • Key Congressional leaders have been notified that this termination could be transmitted as early as Monday.
      • Numerous Senators and House members, from both parties, have voiced opposition to any plan to terminate KORUS.
    • It is unclear whether the contemplated termination is a negotiating ploy, a reflection of the President’s mounting frustration with both North and South Korea, or a manifestation of the populist anti-trade rhetoric the President has been expressing recently.
    • It is also unclear to what extent the escalating crisis in North Korea is having on the President’s tactical and strategic decision-making with respect to KORUS.
      • While conventional wisdom and the national security apparatus suggest that the North Korean nuclear crisis is precisely the wrong time to undermine relations with South Korea, signals have been emerging from the White House that the President may be moving in an opposite direction.
      • This afternoon, the President released a series of tweets relating to the North Korea crisis.
        • One tweet, which seemed to have been aimed as South Korea, noted, “South Korea is finding, as I have told them, that their talk of appeasement with North Korea will not work, they only understand one thing!”
        • A second tweet, possibly aimed at China, noted, “The United States is considering, in addition to other options, stopping all trade with any country doing business with North Korea.”
  • If the President does invoke Article 24.5, and no further action is taken, KORUS will terminate 180 days after such notice is given.
    • Article 24.5 provides an opportunity for either the U.S. or South Korea to request a delay, in whole or in part, of the termination date.
      • Presumably, although not expressly outlined in the agreement, the United States could cancel or suspend the termination request.
      • Congressional roles and actions to block such a move are unclear.
  • From our perspective, there are four principle ways in which termination could affect the industry.
    • Duty increases on U.S. imports from South Korea.
      • Without KORUS, duties on U.S. imports from South Korea would snap back to the pre KORUS normal trade relations level.
      • For the year ending June 2017, the U.S. imported about $620 million in yarns and fabrics under the KORUS, or about 28 percent of total yarns and fabrics imported under FTAs.
        • South Korea remains one of the top five sources of yarn and fabric imports, used for domestic manufacturing operations.
      • During that same period, apparel imports under the KORUS equaled about $186 million, or about 1.4 percent of total apparel imports under FTAs.
        • More than 2/3 of this trade is in synthetic apparel.
        • South Korea also ranks among the top suppliers to the U.S. market in particular product categories, such as socks.
      • Although South Korea is only the 18th largest source of footwear into the U.S. markets, U.S. imports from South Korea have increased by more than 58 percent from 2011 (the year before KORUS took effect) until 2016.
        • Data for 2017 shows continued increases in footwear.
    • Duty increases on U.S. exports to South Korea.
      • Without KORUS, duties on U.S. exports to South Korea would snap back to the pre KORUS normal trade relations level.
      • For the year ending June 2017, the U.S. exported about $308 million in textiles and apparel.
        • The U.S. exported approximately $80 million in apparel, $84 million in yarn, and $97 million in fabric to South Korea.
        • The U.S. exported approximately $38 million in footwear in 2016 to South Korea, about half of what it exported there during 2011.
    • Impact on Haiti
      • Termination of the KORUS would also have an impact on Haiti.
      • Under the Haiti HELP/HOPE trade provisions, apparel that is imported under the so-called value added provision (HTS 9820.6125 and 9820.6130) can be imported into the U.S. duty free provided a certain percentage of the export value of the garment can be attributed to Haiti, the U.S., or any one of the preference or FTA countries.
        • Since Korea is an FTA country, its inputs can be credited to this percentage.
        • For the year ending June 2017, about 50 million square meter equivalents (SME) of garments entered under these provisions about double what came in just two years ago, but still only about 16 percent of total apparel imports from Haiti.
    • Precedent
      • Although President Trump has threatened to terminate free trade agreements, including repeated threats this past week with regard to the North American Free Trade Agreement (NAFTA), he has yet to carry through with these actions.
      • The NAFTA threats have triggered a fierce debate in Washington over whether the President has the ability to act alone or whether he needs the assent of Congress.
        • Such action on KORUS, if carried out, may trigger similar political and legal challenges and could be a harbinger for NAFTA.
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