Trump Administration Weighs Withdrawal From South Korea Trade Pact -- 3rd Update

The Trump administration is weighing giving notice to South Korea of plans to withdraw from a five-year-old bilateral trade pact, with a decision arriving as soon as this coming week, according to people familiar with the matter.

President Donald Trump has repeatedly complained about the pact and the sharp increase in the U.S. trade deficit that followed the 2012 implementation of the agreement. Trade negotiators from the two countries have held a series of tense meetings over the summer with American officials leaving unhappy with what they felt was Korea's unwillingness to make significant changes to the U.S.-Korea Free Trade Agreement, known as Korus, according to people briefed on the meetings.

A White House spokeswoman said Saturday that "discussions are ongoing" with Seoul over the pact but declined to elaborate further. "We have no announcements at this time," the spokeswoman added.

It is unclear whether the White House is really considering abrogating the pact, or wants to use the threat as a negotiating tactic to bring Seoul back to the bargaining table.

"It's a real question how serious this is," said one person outside the administration who was familiar with its discussions.

Inside the White House, Mr. Trump and U.S. Trade Representative Robert Lighthizer have shown interest in withdrawing the from the deal, said multiple people familiar with the internal debate. Mr. Trump has been frustrated with the slow pace of negotiations over Nafta, and is eager to deliver on campaign promises to rewrite the nation's free-trade agreements, the people said.

On the other side are the former and current military officers advising the president, including national security adviser H.R. McMaster, who have urged more caution and questioned the timing of such a move, the people said.

In a similar way, Mr. Trump threatened in April to withdraw from the North American Free Trade Agreement, before dropping that warning to renegotiate the deal with Canada and Mexico. Those talks are continuing this weekend in Mexico City, and Mr. Trump has in recent days revived his Nafta withdrawal threat should he be unhappy with the results.

Still, U.S. business groups that lobbied heavily for the pact under the Obama administration have taken seriously the potential Korus break, which was first reported by news publication Inside U.S. Trade, and launched a furious weekend effort to quell the prospect.

The National Association of Manufacturers sent an "alert" email to members shortly after 8 a.m. Saturday that said "we understand through multiple sources that. a notice of intent to withdraw. has been drafted." The trade group urged its members "to weigh in as soon as possible with senior administration officials, Members of Congress and governors." A similar flurry of business activity helped block the threatened Nafta withdrawal in April.

Escalating trade pressure on South Korea is also likely to face resistance from the U.S. State Department and the Defense Department, which have been working closely with the Asian ally on a coordinated strategy to counter the rising threat from North Korea's nuclear program -- including Seoul's willingness to install U.S.-made antimissile launchers over deep domestic political opposition.

Mr. Trump is scheduled to meet with top advisers in the White House on Tuesday to discuss the potential withdrawal, according to a person familiar with the planning.

A break in the South Korea trade pact also would be seen by some critics as a sign of further American withdrawal from economic engagement in the region, following Mr. Trump's January pullout from the 12-nation Trans-Pacific Partnership trade pact, which had been negotiated by former President Barack Obama with Japan, Australia, Malaysia, Vietnam, and others, but was never ratified by Congress.

Under the terms of the Korus pact, either side can pull out by giving 180 days notice.

Mr. Trump has branded Korus as "horrible," and during a June White House meeting with South Korean President Moon Jae-in he said the two sides had agreed to renegotiate the deal.

Mr. Moon and his aides have repeatedly denied that they were willing to go that far, though they have agreed to discussions to review possible amendments to the pact.

Under the provisions of the agreement, each side has the right to request a meeting to discuss possible changes, and the Trump administration triggered that clause for the first time under the pact, leading to an Aug. 22 meeting.

That session was tense, according to people who were briefed on it, and the two sides didn't reach any agreements about how to proceed. "Unfortunately, too many American workers have not benefited from the agreement," Mr. Lighthizer said in a statement released after the discussion with his South Korean counterpart. "President Trump is committed to substantial improvements in the Korean agreement that address the trade imbalance," added Mr. Lighthizer, who participated via videoconference.

A USTR fact sheet released with the statement said the U.S. trade deficit in goods with South Korea had more than doubled from $13.2 billion in 2011 -- the year before the pact took effect -- to $27.6 billion in 2016. It noted that the bilateral auto deficit made up about 90% of that deficit.

President Trump and some of his aides have cited bilateral deficits with trading partners as a clear indication of problems in an economic relationship -- a view rejected by many economists, who say that broader macroeconomic factors like savings and investment levels drive trade imbalances, and those can't be altered through trade agreements. But the Trump administration has told the South Korean government it wants to use their pact to address the deficit. At the August meeting, the South Korean government proposed a joint study to examine the causes of the imbalance.

While Mr. Lighthizer cited ongoing trade barriers in South Korea as a factor behind the growing imbalance, some economists say that a sharp economic downturn in the country in recent years has reduced South Korean imports across the board, and they argue that U.S. exports would have fallen much more than the 3% drop registered over the past five years.

Korus advocates also say that some sectors have benefited under the agreement and would suffer from a breach. The U.S. Chamber of Commerce, which also rallied its members Saturday to fight a pullout, circulated a fact sheet saying that "aerospace exports to Korea have doubled to $8 billion" under the pact, while "exports of key agriculture products have soared as Korus has begun to phase out double digit tariffs."

The Chamber notice warned that a pullout "would rupture White House relations with the business and agriculture community" -- ties that have already been strained in recent weeks over other issues, including the dissolution of various White House business councils in the wake of Mr. Trump's handling of the mid-July Charlottesville, Va., protests.

A Korus pullout announcement would also likely aggravate Mr. Trump's already tense ties with Capitol Hill. Lawmakers have repeatedly complained in recent months about what they consider insufficient consultation with the administration over trade policy. In a rare bipartisan move, the four Republican and Democratic leaders of the House and Senate trade committees sent Mr. Lighthizer a letter in mid-July urging him to consult them closely as he reviewed Korus, and to be careful about any dramatic breaks. "The U.S. trade agreement with South Korea remains a key cornerstone of U.S. economic and strategic engagement in the Asia-Pacific region," their letter began.

The administration's debate over a possible Korus pullout comes amid a wide-ranging exploration of changing American trade policy. In addition to renegotiating Nafta, officials are ramping up trade pressure on China, and have studied the possibility of imposing new trade curbs on steel and aluminum imports in the name of national security. Beyond the TPP pullout, though, the administration has done little to change trade policy so far, despite the strong rhetoric.

Write to Jacob M. Schlesinger at jacob.schlesinger@wsj.com, Michael C. Bender at Mike.Bender@wsj.com and Jonathan Cheng at jonathan.cheng@wsj.com

(END) Dow Jones Newswires

September 02, 2017 18:52 ET (22:52 GMT)