Donald Trump's Trade Talk Unnerves South Korea

By William Mauldin in Washington and Jonathan Cheng in Seoul Features Dow Jones Newswires

President Donald Trump's call to rewrite -- or rip up -- a trade agreement with South Korea is alarming some lawmakers and business lobbyists still unnerved by threats earlier this week to pull out of the North American Free Trade Agreement.

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White House officials said Friday that Mr. Trump is dissatisfied with the five-year-old trade deal with one of America's closest Asian allies. Mr. Trump called it "an unacceptable, horrible deal" in an interview Thursday with Reuters, saying Seoul should come to the table to overhaul the bilateral trade agreement or see the U.S. pull out. He also insisted South Korea pay for a potent antimissile system provided by the U.S.

The sudden criticism of a close ally -- and the threat to pull the U.S. out of its second-biggest trade agreement behind Nafta -- triggered a new round of concern among business groups and lawmakers who oversee trade and Asian economic issues. "It's off-the-top-of-the-head reckless, and the effect it will have is destabilizing at a critical moment on the Korean Peninsula," said Rep. Gerry Connolly (D., Va.), co-chair of the Congressional Caucus on Korea. "It's not the right time to start to nickel and dime them about the Korea trade agreement and the defense systems we've encouraged them to accept."

"These comments yesterday are going to catch the Koreans off guard, particularly given the situation in North Korea and particularly because they have a presidential election in days," said Wendy Cutler, a former top U.S. trade official who led negotiations on the agreement and current vice president at the Asia Society Policy Institute.

On Friday, the centrist People's party, whose candidate is running second in the polls for the coming presidential election, issued a statement saying that "existing South Korean-U.S. agreements should be respected."

A senior trade ministry official said the South Korean government hasn't received any official offer from the Trump administration to renegotiate or terminate the pact.

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The Korea deal, largely negotiated under George W. Bush and enacted with amendments under Barack Obama, was aimed at opening the door to U.S. services exports to Asia, boosting American agriculture sales and setting fairer rules of the road for auto trade. Unlike Nafta, the Korean deal includes fully enforceable rules on labor and the environment, as well as an updated dispute-resolution system to protect investors and governments.

But the deal was implemented as Korea's overall import demand was falling, leading to a growing U.S. trade deficit with the country, even as U.S. goods rose as a share of Korea's total imports.

U.S. merchandise exports to Korea have been largely flat under the pact, dipping to $42.3 billion last year from $43.5 billion in 2011. American imports from Korea climbed 23% to $70 billion, buoyed by U.S. demand that expanded following the recession.

While American car exports to South Korea have more than tripled to $1.6 billion, that figure is dwarfed by car imports from the country, at $16 billion, and other categories of imports including cellphones, at $6.3 billion. A bright spot is services, where the U.S. trade surplus with Korea has expanded to $10.7 billion, from $6.9 billion since 2011.

The Trump administration probably won't prioritize a new deal with Korea in the short term, in part because officials are struggling to develop a plan for overhauling Nafta, former officials and trade advisers say.

It is unclear what the administration would change to reduce the U.S. trade gap with Korea, a clear focus for Mr. Trump, without running afoul of World Trade Organization rules. Trade cases against alleged dumping and subsidies already limit the country's steel exports.

One possibility is negotiating new mechanisms for reducing the deficit in auto trade within the current agreement, but the administration could seek a broad deal that would limit South Korean exports to the U.S., according to people following the issue.

Write to William Mauldin at william.mauldin@wsj.com and Jonathan Cheng at jonathan.cheng@wsj.com

(END) Dow Jones Newswires

April 28, 2017 18:41 ET (22:41 GMT)