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Trump Appears Ready to Quit South Korea Trade Agreement and Sourcing Could Pay the Price

In keeping with the trend of current things in trade, President Trump seems to be seriously considering quitting KORUS, the free trade agreement between South Korea and the United States, as soon as this week.

According to reports, Trump has instructed his advisers to prepare documents that would provide a six-month notice for the U.S. to withdraw from the deal—a move that in itself is expected to stoke tensions, and it comes just as North Korea tested a hydrogen bomb as part of its nuclear weapons program. The president is reportedly frustrated over the pace of talks, which started on Aug. 22.

If KORUS does get dealt this blow, the apparel and textile industry would be facing duty increases on U.S. imports from and exports to South Korea. As part of the five-year old deal, the U.S. and South Korea had agreed to cut tariffs on roughly 95 percent of the consumer and industrial products they trade.

Immediately following the first round of KORUS talks, the Office of the United States Trade Representative, issued a statement quoting U.S. Trade Rep Robert Lighthizer saying, “Unfortunately, too many American workers have not benefitted from the agreement. USTR has long pressed the Korean government to address burdensome regulations which often exclude U.S. firms or artificially set prices for American intellectual property.”

It’s not yet clear whether the talk of termination is a negotiating ploy or part of the president’s ongoing anti-trade rhetoric, according to an update from the American Apparel & Footwear Association. It’s also unclear how the escalating crisis in North Korea is impacting these potential moves on trade.

“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,” AAFA said.

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As has been the habit, Trump turned to Twitter on Sunday saying first, “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,” He followed that tweet with another saying, “The United States is considering, in addition to other options, stopping all trade with any country doing business with North Korea.”

[Read more about what’s happening with North Korea: Turns Out More Factories in North Korea are Making ‘Made in China’ Apparel]

An opinion piece in the Korea Times said a U.S. move to nix the deal could “poison” the two nations’ alliance. The article pointed to two reasons for Trump’s stance on KORUS that fall in line what the AAFA alluded to: one, he wants to maximize leverage in the next round of talks with South Korea, or, two, he may be willing to ditch KORUS in an effort to position himself for a bigger win with NAFTA renegotiations.

Either way, it may spell unfortunate news for the U.S.

“We are afraid the termination of the trade deal will end up a typical case of a lose-lose game. As various U.S. economists and industrialists have pointed out, the U.S. trade deficit with South Korea may not be due to the unfair trade accord but to macroeconomic factors, such as the difference in industrial structures of the two countries, disparate business cycles and the Fourth Industrial Revolution,” the Korea Times editorial noted. “Losers will be not just industries whose price competitiveness will sharply weaken in the import markets of each country but also consumers, American and Korean. The only, if short-term, winner will be President Trump with rising approval rating among supporters.”

USTR said in a July statement calling for review of the U.S.-Korea trade agreement, that the trade deficit with South Korea has doubled from $13.2 billion when the deal took effect in March 2012, to now $27.6 billion.

A closer look at the impact on apparel and textiles

With no free trade agreement with South Korea in place, all duty savings would be eliminated.

For the year ended June 2017, according to the AAFA, the U.S. imported roughly $620 million in yarns and fabrics under KORUS, which amounts to 28 percent of total yarns and fabrics the U.S. imported under free trade agreements in the period.

“South Korea remains one of the top five sources of yarn and fabric imports, used for domestic manufacturing operations,” AAFA said.

Over the same period to June, apparel imports under KORUS amounted to $186 million, roughly 1.4% of total apparel imports under FTAs, more than two-thirds of which is synthetic apparel.

Though South Korea isn’t among the top sources of footwear for the U.S., imports of shoes from the country increased upward of 58 percent between 2011 (before KORUS was implemented) and 2016. South Korea also happens to be among the top sources of socks for the U.S., so that market could take a hit, too.

In terms of U.S. exports to South Korea, American textiles and apparel exports bound for the nation in the year to June totaled $308 million, $80 million of which was apparel. Footwear exports from the U.S. to South Korea amounted to $38 million, just half of what it was exporting pre KORUS.

Sourcing from Haiti could also feel the effects of a terminated U.S.-Korea trade deal.

As part of the Haiti HOPE/HELP trade preference programs, apparel imported under the value-added provision can come into the U.S. duty free as long as a certain percentage of the garment’s export value can be attributed to Haiti, the U.S. or any other preference or FTA country.

“Since Korea is an FTA country, its inputs can be credited to this percentage,” AAFA said. “For the year ended 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.”