[Chatham House Roundtable] "US Trade Unpredictable... Many Sanction Measures Available"

"US-Korea FTA Revision Leads to 2.5 Times Increase in Trade Surplus with US... Subject to Regulation"
"Whoever Becomes President, US Investment Itself Is an Incentive"

Editor's NoteIs it the resurrection of Donald Trump or the re-election of Joe Biden? South Korean companies are on high alert regarding the outcome of the U.S. presidential election to be held this November. A sudden shift in trade policy could force a complete overhaul of the export and market penetration plans they have been pursuing. Especially if a second Trump administration takes office, there is a significant concern that existing policies such as the U.S. Inflation Reduction Act (IRA) might be repealed or drastically revised, substantially increasing management risks. On the 31st of last month, Asia Economy held a 'Chatham House Roundtable' at its headquarters in Jung-gu, Seoul, to discuss changes in trade policy after the U.S. election and how South Korean companies should respond. The Chatham House is a nickname for the Royal Institute of International Affairs (RIIA) in the UK, regarded as a top-tier research institution in diplomacy and security. The roundtable included Yoo Myung-hee, Visiting Professor at Seoul National University Graduate School of International Studies (former Director-General for Trade at the Ministry of Trade, Industry and Energy), Pyo In-soo, U.S. attorney at law at Bae, Kim & Lee LLC, and Heo Yoon, Professor at Sogang University Graduate School of International Studies (in alphabetical order). The roundtable followed the Chatham House Rule, disclosing the list of participants but keeping individual remarks anonymous.

At the 'Chatham House Roundtable' held at the Asia Economy headquarters in Jung-gu, Seoul on the 31st of last month, participants are sharing their opinions on the U.S. presidential election and corporate trade strategies. From the left, clockwise: Heo Yoon, Professor at the Graduate School of International Studies, Sogang University; Choi Il-gwon, Head of the Industrial IT Department, Asia Economy; Yoo Myung-hee, Visiting Professor at the Graduate School of International Studies, Seoul National University (former Chief Trade Negotiator, Ministry of Trade, Industry and Energy); Pyo In-soo, U.S. Attorney at Law, Bae, Kim & Lee LLC. Photo by Kim Hyun-min kimhyun81@

▶Moderator = Choi Il-kwon, Head of Industrial IT Department

In the upcoming U.S. presidential election this November, attention is focused on whether Republican candidate Donald Trump will be elected. Compared to the current Biden administration, what do you see as the most significant changes in trade policy?

I read a Heritage Foundation report titled 'Mandate for Leadership.' It expressed considerable caution by listing South Korea alongside China, Germany, and Japan as countries with trade surpluses against the U.S. There is concern that if Trump is elected, not only China but also South Korea could face increased containment. The Biden administration pressures China through 'multilateral pressure' with allies, but the Trump administration is likely to act unilaterally. This could cause rifts among allied countries.

Regardless of who wins, fundamentally, the goal to revive U.S. manufacturing and bring jobs back to the U.S. will remain the same. What South Korea really needs to watch out for is that during the 2018 Korea-U.S. Free Trade Agreement (FTA) renegotiations, the U.S. argued that the Korea-U.S. FTA was the main cause of the trade deficit and needed revision. In 2017, the U.S. trade deficit with South Korea was $17.9 billion (about 23.85 trillion KRW). However, after the revision, last year it increased to $44.5 billion (about 59.3 trillion KRW), a 2.5-fold increase. If South Korea becomes a trade deficit country, it risks facing various trade barriers and regulations.

Not only China but all countries including South Korea, the European Union (EU), and Japan could be targeted. Now, all countries could get caught up in the tariff wars of the Trump era. There will likely be significant differences in environmental issues as well. The Trump administration withdrew from the Paris Climate Agreement. Subsidies are also an environmental issue. Trump’s stance on these matters seems firm. Relations with the EU will likely become quite difficult. Since the first Trump administration, the EU has had friction with the U.S. and has tended to act independently. The EU operates separately from the U.S. on supply chains, batteries, and semiconductors. Under the Biden administration, there was a process of negotiating and moderately adjusting Section 232 of the Trade Expansion Act, which was created during the Trump era. That will be difficult under a second Trump administration. Especially on environmental issues, the EU’s position is firm. The EU is continuously trying to take the lead on environmental matters such as the Carbon Border Adjustment Mechanism (CBAM) and the French version of the Inflation Reduction Act (IRA), and these have significant influence. There is also a high possibility of clashes with the U.S. in the digital sector. The EU’s Digital Markets Act (DMA) has considerable impact. I think friction with the U.S. in this area will intensify.

If the next government enacts legislation imposing tariffs on carbon, how much damage would South Korean companies face?

According to Trump’s campaign promises, he would rather provide subsidies for fossil fuels and create an international coalition for fossil fuels. He seems to think the IRA is a flawed law. Basically, environmental policies are unlikely to be strengthened under a Trump administration.

It is more likely that the environment will be used as a means to impose tariffs. The current trend is to advocate for sustainable steel while using environmental reasons as a pretext. Regarding the environment, one thing South Korean companies need to be aware of is that if a Trump administration returns, they should not only consider the elimination of IRA subsidies. Recently, Republican lawmakers including Lindsey Graham (South Carolina) introduced the 'Overseas Pollution Tariff Act,' which imposes tariffs on carbon-intensive imports. Supporting this bill is Robert Lighthizer, former U.S. Trade Representative (USTR). In a second Trump administration, former National Security Advisor Robert O’Brien would be a key figure in diplomacy, and Lighthizer would be central in trade. The bill was introduced by Republican lawmakers and is supported by Lighthizer, reflecting the current atmosphere in Washington. There is concern that the Republican Party might impose a carbon tax.

Reading Lighthizer’s book 'No Trade Is Free,' it feels like he is deeply devoted to the 'Trump religion.' It seems he views themselves as revolutionaries.

I heard Trump bought and circulated that book.

If Trump is elected, will the officials who worked in the first Trump administration also be positioned in the second?

Looking at the people who created Trump’s campaign promises during the first term, their backgrounds differ. One is Peter Navarro, former Director of the White House Office of Trade and Manufacturing Policy, and the other is a neoclassical market economist. Their prescriptions differ. In the first Trump administration, many opposed the policy direction. There were many so-called 'globalists.' From an economic perspective, mainstream economists argued that tariffs and trade deficits were not due to trade but because Americans consumed a lot, and there was a significant effort to persuade on this. However, in a second Trump administration, many of those people will likely disappear. What I am watching closely is that the Heritage Foundation continues to release policy books for the Republican Party. Among past Republican presidents, Trump is the one who has reflected the most of Heritage’s proposals. Navarro pushes very extreme and strong trade policies, but I think unexpected policies will be filtered out. That gives some relief.

During the first term, globalists and America First advocates worked with some tension and checks. But globalists or free trade advocates are unlikely to return in a second Trump administration. Therefore, the U.S. is likely to take a strong stance from the start, such as imposing tariffs to gain negotiation leverage. Whether it is scrapping the Korea-U.S. FTA or something else, the second Trump administration will be composed only of those who take the lead in negotiations after making bold moves. Based on the first term, we must prepare for unimaginable scenarios. If the U.S. imposes tariffs to secure negotiation advantages, South Korea must develop the expertise to respond calmly and professionally.

Trump himself is very confident about a second term because despite many legal risks, he has solid support and a high chance of winning. His aides have studied past Trump policies and observed the Biden administration’s failures, gaining strong conviction that this path is correct. Advisors will likely be composed mainly of such people. The second Trump administration will be more stable. The first term was marked by uncertainty even from Trump himself in policy execution, but the second term will be more sustainable and implement firm and strong policies.

The Biden administration has adopted some policies from the first Trump administration.

Biden and Trump are politicians. Currently, nationalism and protectionism are global phenomena. Most countries feel fatigued by globalization. The general public does not feel the benefits of many promises made during globalization. This manifests as China shock, technology shock, and immigration shock. Research shows that the more contact with China, the more the middle class collapses, jobs are lost to China, and wages decline. This is perceived as the China shock. Labor markets polarized due to China, and digital technology further deepens polarization ? the technology shock. Many countries have come to admire nationalist movements and politicians. Even after Biden took office, politically he must follow voter sentiment. I think both Biden and Trump are deeply immersed in domestic politics rather than continuing trade diplomacy policies.

Trump did trigger anti-globalization and nationalism. Before him, the WTO system operated. But after he took office, he brought out things like Section 232 of the Trade Expansion Act, which was unthinkable. How is a car related to national security? Most car manufacturers are allied countries’ companies. Yet tariffs were imposed on such countries. Trump’s basic policy is to make America great again. His confidence in a second term is very high because despite many legal risks, he has solid support and a high chance of winning. Another factor is that the environment has changed. During Trump’s term, COVID-19 emerged, and global supply chains began to collapse, affecting countries worldwide.

Trump’s campaign agenda 'Agenda 47' and journalist Bob Woodward’s book 'Rage' mention the Korea-U.S. FTA. It seems Trump views its revision as a major achievement. Will he push to revise the Korea-U.S. FTA again?

On the 31st of last month, at the Asia Economy headquarters in Jung-gu, Seoul, Professor Heo Yoon from Sogang University Graduate School of International Studies, Visiting Professor Yoo Myung-hee from Seoul National University Graduate School of International Studies, and Pyo In-soo, an American lawyer at Bae, Kim & Lee LLC (from left), held a preliminary discussion at the "Chatham House Roundtable." Photo by Kim Hyun-min

From the U.S. perspective, there is the United States-Mexico-Canada Agreement (USMCA), but South Korea seems much more vulnerable than Mexico. A common criticism of the Korea-U.S. FTA is its connection to China. There is a perception that products exported from South Korea to the U.S. or Europe use cheap Chinese raw materials as a loophole. There is a strong belief that POSCO brings in cheap Chinese raw materials and operates using South Korea’s cheap electricity. The U.S. is truly unpredictable. It can create new laws anytime and bring out unexpected measures like Section 232 of the Trade Expansion Act.

Lighthizer says that China’s investment in Mexico’s auto sector must be blocked from entering the U.S. Because Mexico’s rules of origin are loose, Chinese investments in Mexico are disguised as Mexican products entering the U.S. The USMCA’s rules of origin are much stricter than the Korea-U.S. FTA, especially for autos. Even without touching the Korea-U.S. FTA, there are many ways to erect trade barriers. The Korea-U.S. FTA renegotiation was a successful achievement of the first Trump administration, so it should not be assumed it will remain untouched.

The government also values trade and economic security and has established organizations. Has it built better networks than during the first term?

People affiliated with think tanks such as the America First Policy Institute (AFPI), Conservative Partner Institute (CPI), Center for Renewing America (CRA), and America Restoration Action (ARA) are involved in the Trump camp. Many who are likely to hold high positions in the future belong to these organizations. It might be good to build connections with these think tanks. The Heritage Foundation plays the biggest umbrella role. I have not seen anyone in South Korea particularly close to Trump. Trump is a character who is personally hard to get close to.

People who understand both South Korea and the U.S. government could serve as bridges. For example, former U.S. Ambassador to South Korea Mark Lippert. Former Ambassador Sung Kim also served under both Trump and Biden administrations.

Former USTR Lighthizer takes a very strong stance on China. Policies focusing more on China could be expected. Especially, decoupling in strategic industries will intensify. Since Lighthizer is expected to play a major role in economic and trade affairs, it is important to leverage negotiation experience and networks with his side.

Did you recruit former Ambassador Lippert or former U.S. Deputy Secretary of State Stephen Biegun?

Nowadays, it is the 'era of big government.' When selling cheap goods, companies did not need to consider geopolitics. But now, with government intervention and policies causing management uncertainty, companies cannot ignore geopolitics. Companies and governments must act as one team considering geopolitics. The expression 'company-government one team' seems to be used recently even in the West.

Large countries like the U.S. and China internationalize and multilateralize their domestic policies. To enter our market, they argue that companies must comply with our laws. It is not easy for private companies to conduct deep research on geopolitics, geography, and each country’s policies. In many areas, the private sector wants the government to play a role and provide help. For example, in the case of critical minerals in supply chains, from mining to refining, various regulations of the country’s government are involved. If the government does not manage this and leaves it to private companies, it will take forever.

Do you think the current government, especially the Trade Negotiations Office, is well prepared for movements after the U.S. election? The WTO seems to no longer function.

Recently, the Trade Negotiations Office has been working very closely with companies, especially regarding IRA and electric vehicle lease provisions. Last year, automobile exports were high. The same applies to semiconductors. Regarding China’s equipment import restrictions, the government now works very closely with companies, unlike in the past. We have lived too long as a 'model multilateralist.' Even though multilateralism is deteriorating, we are obsessed with it. Even a slight increase in subsidies is avoided because it violates multilateral principles. It is no exaggeration to say that multilateralism is over worldwide.

The Biden administration was similar, but under a second Trump administration, the WTO will not function at all. In a completely changed environment, supply chains, export controls, and technology personnel issues are all intertwined. A new organization outside the government may be needed to manage related information. Economic security is 'industry' security separated from 'defense' security. The Ministry of Trade, Industry and Energy has a Trade Security Bureau and director-level organization, but it is very small and fragmented. Something like an Industrial Security Office is needed, allowing the ministry to play a bigger, comprehensive role. It may be extreme, but I think an 'Industry Deputy Prime Minister' is necessary.

The Presidential Office’s Third Deputy for Security is now responsible for economic security.

Economic security is a very broad concept. I don’t understand why cars should be considered economic security. The U.S. Department of Commerce is called 'Industry & Security.' They emphasize industrial security. Economic security is too broad a concept. When people think of security, they usually think of defense issues. Industrial-related security should be emphasized more.

If you look at economic security policies worldwide, four common points emerge: ① Supply chains ② Data and critical infrastructure ③ Technology leakage ④ Industrial development including technology and energy. If the Presidential Office’s Third Deputy for Economic Security is a kind of control tower, that organization focuses on U.S.-China export controls. It will likely be limited to areas like how to protect infrastructure and data. Technology and energy-related industrial policies are the ministry’s domain. There is criticism that trade is overemphasized recently, but I think it is a desirable trend for a trade expert to serve as minister when economic security is so important.

The U.S. views economic security as 'China containment' because it has much to protect. The government’s role in industrial development is limited. Each country’s focus on economic security varies greatly. Countries like South Korea need both protection and promotion. I hope the Trade Negotiations Office will announce strategies and visions on what economic security strategies and priorities South Korea needs.

The importance of market development is realistic for us. Although slightly outside economic security, the EU recently introduced the '3Ps': Promotion, Protection, and Partnership. It means operating supply chains stably in cooperation with other countries. Protection means protecting each country’s supply chains, preventing technology leakage, and securing data infrastructure. Promotion means industrial policy, where the government provides large-scale funding to foster technology. The 3Ps cover almost all aspects of economic security and originated in the EU.

Looking at Section 232 of the U.S. Trade Expansion Act, everything is related to security. Economic security started there. In South Korea, economic security is heavily skewed toward 'security.' Economics has both macro and micro aspects. Macro is important, but there are immediate survival needs. For example, minerals are indispensable. That is 'industry.' Economics is a broad concept intertwined with the clear concept of 'military.' More precisely, economic security should focus on industry. The concept is too broad in South Korea and may be perceived as 'ambiguous military.'

It is confusing. When talking about economic security, people keep mentioning 'military security.' That is a misunderstanding. Energy security means securing energy well. Food security means ensuring the entire population does not starve. Economic security means protecting the economic survival and prosperity of the people.

Former USTR Lighthizer is a hardliner on China, so it seems U.S.-China relations will not improve. If the U.S. tightens regulations on China, we could suffer more damage. China remains the largest market. How should we approach this?

From the left, Yum Yumi, Visiting Professor at Seoul National University Graduate School of International Studies; Pyo Insu, U.S. Attorney at Law, Bae, Kim & Lee LLC; Heo Yoon, Professor at Sogang University Graduate School of International Studies. Photo by Kim Hyunmin

U.S.-China tensions will likely continue regardless of the administration. Taiwan is also an issue. In a recent Fox News interview, Trump said about Taiwan, 'Taiwan is a small island country. Isn’t it enough to just get the TSMC semiconductor there?' Trump tends to throw things out and negotiate later, so Taiwan could become a bargaining chip. The problem is South Korea. During the Trump era, there is a high possibility that the U.S. will demand fair compensation from South Korea for what it must receive for U.S. interests. If Trump is elected, U.S.-China relations will worsen, but South Korean companies might have a bit more room to maneuver.

Currently, Taiwan is likely to be a 'trigger.' Once the U.S. applies the 'Enemy Trade Act,' freezing Chinese assets and completely halting trade, who knows what will happen to China. If China attempts to change the status quo by force, the U.S. could respond decisively. If China uses military force over Taiwan’s independence, it could lead to a world war. The current government has clearly established strategic clarity among South Korea, the U.S., and Japan at the top level. Regarding China, strategic flexibility can be exercised by sector, industry, and issue. Since strategic clarity is declared at the highest level, practical benefits can be pursued at lower levels (companies).

Will the South Korea-U.S.-Japan alliance be maintained even if the Trump administration returns?

It seems likely to weaken. Some scholars believe that if the Trump administration returns, it might implement a 'wedge strategy' against South Korea. This strategy involves driving a wedge into a slightly widened gap. Secondly, China will employ a 'united front tactic,' which involves enticing secondary enemies (U.S. allies) and then allying with them to fight the main enemy (the U.S.). If relations between the U.S. and its allies deteriorate under a Trump administration, China will have significant room to maneuver.

Recently, Trump said he would cut all dependence on China for all items that could be affected. Has he decided to completely sever supply chains with China? Even if not feasible, does he have the will?

It will not be that easy.

Knowing that 'full decoupling' is unrealistic, he has entered 'selective decoupling.' It will be difficult. Full decoupling from China would cause unimaginable pain to Americans.

If Trump is elected, should companies increase investment in the U.S.? Should companies already investing in the U.S. consider additional investments now?

It is not certain, but Samsung is said to be flexible regarding batteries, while LG and SK are in a somewhat difficult position. The second Trump administration will likely require everyone selling products in the U.S. to operate within the U.S. Such industrial policies are likely. Extremes aside, corporate profits and national economic interests may not align in the Trump era. If industrial bases are reorganized around markets, large market countries have no problem. Our market is small. We have different concerns from the U.S., Europe, or Japan.

The Rust Belt is a swing state, politically the most important region for votes. Therefore, job creation is essential. Past trade policies involved lowering tariffs. Now, tariffs remain, and trade barriers on imports increase. The U.S. argues that 'if you produce on our soil, there are no barriers.' It is not an incentive but a penalty-free policy, which ironically becomes an incentive. To operate without trade barriers, companies must invest. Otherwise, they risk sanctions like Section 232 or carbon taxes. Investing in the U.S. to avoid sanctions is the incentive. Whoever becomes president, this trend will continue. If Trump is elected, barriers will be erected more blatantly. Countries with markets use those markets as leverage to attract foreign investment.

Coincidentally, South Korean companies’ investments are concentrated in U.S. swing states.

Companies will be quite embarrassed because they experienced the first Trump administration. We invested heavily in the U.S. because laws provided substantial subsidies and incentives. Companies decided to invest for those reasons. But if the second Trump administration withdraws from those policies, what then? Without incentives, will companies invest under Trump’s demands? They will likely delay current investments and wait to decide on new investments after observing the situation. Inflation is high here, but it is also significant in the U.S. As seen in USMCA, the U.S. has many industrial constraints. Operating costs for local companies are higher than expected. Companies will carefully consider whether such investments are sustainable.

This content was produced with the assistance of AI translation services.