Could the successful Korea-U.S. tariff negotiations, which lowered the reciprocal tariff from 25% to 15% by preparing a special strategy industry cooperation fund of $3.5 billion to support U.S. investments and purchasing $10 billion worth of U.S. energy, be evaluated positively? Moreover, is the government's statement about preventing the opening of the rice market accurate?
The 'dreaming of different dreams' behavior of South Korea and the United States, which explains the tariff negotiation results differently, continues to spark controversy as of the 1st. In particular, during the recent Korea-U.S. trade negotiations, there was only a verbal agreement, and there is no document confirming the content of the agreement. The U.S. claims that there was no such agreement, raising the possibility of distorting the framework of negotiations.
As a result, analysis indicating that this trade negotiation outcome is unfavorable for Korea has followed, leading to growing distrust towards the government's negotiation results. We import American cars at 0% tariff, but to export Korean cars to the U.S., we have to pay a 15% tariff. It is as if only we are adhering to the mutual free trade agreement (FTA) that was concluded. The government has not been able to leverage any benefits of the FTA and has accepted the same tariff rate as Japan and Europe, which did not sign an FTA with the U.S. This issue is not limited to automobiles.
Given the circumstances, the South Korean financial market was volatile on the 1st. The KOSPI market plummeted by 3.9%. Disappointment over the first tax reform plan of the Lee Jae-myung government, which included a tax increase proposal, and anxiety over the tariff negotiation results led to a cold reaction from the capital market. On that day, the won-dollar exchange rate rose to the 1400 won range for the first time in more than two months due to the strong U.S. dollar and the sale of domestic stocks by foreigners.
◇ U.S. 'rice opening'... Possibility of further round of trade negotiations ahead
While the South Korean negotiating delegation stated that no additional market opening was discussed regarding rice and beef in the Korea-U.S. trade negotiations, the U.S. mentioning 'rice opening' in an official context has raised the possibility of further trade negotiations.
White House spokesperson Karoline Leavitt stated during a White House briefing on the 31st at 1:24 p.m. (local time, 3:24 a.m. on the 1st in Korean time) that 'the South Korean delegation met with President Trump yesterday to conclude negotiations,' adding that 'Korea will have to pay a 15% tariff and will provide historic market access to American goods like autos and rice.' Leavitt's briefing remarks were consistent with what President Trump posted on Truth Social the day before.
This contradicts the official explanation from the South Korean government. Earlier, Kim Yong-beom, head of the presidential office's policy office, announced in an emergency briefing on the morning of the 31st that 'considering food security and the sensitivity of agriculture, we agreed not to open the domestic rice and beef markets further.' Gu Yoon-cheol, deputy prime minister and minister of the Ministry of Economy and Finance who was head of the negotiating delegation in the U.S., met with reporters after returning from the trip on the afternoon of the 1st and said, 'There has been no discussion regarding additional opening of the rice market.'
However, since the agreement, the U.S. has consistently mentioned the opening of the rice market. In response, the presidential office and the government have reiterated that 'it should be understood as a political leader's expression.' They argue that it must be seen as a political rhetoric aimed at showcasing the accomplishments of the trade negotiations to the domestic support base. Officials from the trade negotiation headquarters and the Ministry of Agriculture, Food and Rural Affairs have shown similar responses.
The issue lies in Trump's way of thinking. President Trump stated in his previously published 'Art of the Deal' that 'the way I make transactions is very simple and clear. I set high goals and keep pushing forward to achieve them.' He added, 'Sometimes I fall short of my goals, but in most cases, I achieve what I wanted.'
If President Trump has in mind the goal of expanding U.S. rice exports to Korea, we cannot rule out the possibility that he might suddenly bring it up as an agenda item in the upcoming Korea-U.S. summit set for within two weeks. Considering that the South Korean delegation at the Korea-U.S. trade negotiations in Washington consisted of bureaucrats with no political decision-making power, it could be more efficient to discuss sensitive agricultural market opening issues directly between the leaders. Particularly, without a document containing the agreement, Korea's means of response is limited.
In this regard, Jang Sang-sik, head of the Korea International Trade Association's International Trade Research Institute, noted that 'given Trump's character, there is a possibility he might randomly throw topics he wants into the summit agenda,' and he added, 'From what is currently being announced, there are differences in the statements between the representatives of both countries. Things will become clearer through press conferences held after the summit.'
In response, a Ministry of Industry official stated, 'As of now, it is certain that there has been no additional agreement regarding the opening of agricultural markets between Korea and the U.S.,' but added, 'However, when asked if such an agreement is permanent, I cannot give a definitive answer. The landscape for trade has changed significantly.'
◇ They said they would use 'Korea-U.S. FTA' as leverage... No difference with Japan and EU
In entering trade negotiations with the U.S., the South Korean government stated it would use the FTA with the U.S. as leverage to create a more favorable agreement compared to competitor countries such as Japan.
Korea and the United States signed the FTA in May 2007. The FTA went into effect in March 2012 and underwent a revision in 2019. According to the FTA, Korea applies an average tariff of 0.79% on U.S. imports. The tariff rate for manufactured goods, excluding agricultural products, is 0%. We were also benefiting from reduced export tariffs based on the FTA to the U.S. The government's negotiation goal was to ensure the continued mutual benefits in the new trade agreement.
However, these goals have fallen through. Rather, assessments suggest that the Korea-U.S. tariff negotiations have rendered the product trade provisions of the FTA obsolete.
Through this negotiation, we import U.S. products at 0% tariff, but to export to the U.S., we have to pay a 15% tariff. Whether Korean corporations or U.S. buyers ultimately bear the tariffs imposed by the U.S. depends on negotiations between the companies. Although the taxpayer is the U.S. buyer importing the goods, they can pass on the costs to Korean corporations.
Japan and the EU, which did not conclude an FTA with the U.S., are subject to the same tariff rates as us. When comparing cars, the benefit of Korean cars having a 2.5% lower tariff than Japanese cars has disappeared.
Of course, there are evaluations that it would have been realistically difficult to achieve the desired outcome while the world's strongest nation, the United States, unilaterally created a 'tilted playing field' and proceeded with negotiations.
Another issue is that, despite reaching an agreement favorable to the U.S., no official document to guarantee the negotiation results was produced. Currently, Korea and the U.S. are explaining differently regarding not only the rice opening but also the profit-sharing rate of the fund investment. This negotiation was conducted under unfavorable conditions, and to ensure this, an agreement document signed by both sides must be created. This is the standard framework for trade negotiations.
The fundamental reason for the differing explanations of the negotiation results between the two countries also stems from the absence of an agreement document. Director Jang stated, 'It seems that the U.S. hasn't been able to create a document form agreement because it is simultaneously conducting tariff negotiations with multiple countries,' adding, 'However, discrepancies have been found in the trade agreements that the U.S. has concluded with other countries. To prevent friction after the agreement, I believe it is important to outline the agreement details in document form.'
Song Yeong-gwan, a senior researcher at the Korea Development Institute (KDI), expressed, 'I think the government may not have wanted to create an official agreement document. It could have adopted a strategy of keeping ambiguity strategically. If the response is part of a strategy to maintain the framework of the Korea-U.S. FTA by delaying legislation, it may not be a bad strategy.'
The market has reacted coldly to the results of the Korea-U.S. tariff negotiations. On the day following the tariff negotiations, the 1st, the stock prices of Hyundai Motor and Kia fell by 4.48% and 7.34%, respectively, compared to the previous day. In contrast, Toyota's stock price soared by about 15% on the day of the agreement on tariff negotiations between Japan and the U.S. These evaluations from the capital market indicate that the results of the tariff negotiations were unfavorable for Korean cars but favorable for Japanese cars.