The Korea FTA’s Contribution to the U.S. Trade Deficit

We’re continuing our series of facts in response to the Korean Embassy’s misleading claims on the Korea Free Trade Agreement (FTA). Our full response can be viewed here. This time, the focus is on the Korea FTA’s projected increase in the U.S. trade deficit.

Lori Wallach’s Huffington Post piece: The “U.S. International Trade Commission has concluded that the Korea agreement will increase the overall U.S. trade deficit.”

Korean Embassy’s claim: “The ITC clearly cautioned users of its data against doing exactly what Ms. Wallach and others have done: the ITC’s simulation results “should not be interpreted as changes in total imports and exports, or as implying meaningful information about the balance of trade impact of the entire U.S.-Korea FTA.” In its 2007 report, “U.S.-Korea Free Trade Agreement: Potential Economy-wide and Selected Sectoral Benefits,” the ITC predicted that the agreement would increase U.S. merchandise exports to Korea by $9.7 billion to $10.9 billion and merchandise imports from Korea by $6.4 billion to $6.9 billion.”

Facts: Embassy continues to dodge the fact that the Korea FTA will be lose-lose. While it cites the USITC projections on the bilateral trade balance showing Korea would lose, it ignores the fact that the U.S. global trade deficit is expected to increase – and it is the U.S. global balance that will affect jobs here.

The USITC’s study on the Korea FTA predicted that implementation of the Korea FTA would cause total U.S. exports to rise by $4.8-5.3 billion dollars and total U.S. imports to rise by $5.1- 5.7 billion, resulting in an increased trade deficit of $308-416 million.[i] This result is inseparable from the other findings in the report, including those that the FTA boosters prefer to highlight.

Interestingly, the USITC has not in the past made caveats like the one quoted in regards to its findings, despite the fact that its model’s track record has proven to be overly optimistic. For instance, a 1999 USITC study using roughly the same model estimated that China’s tariff offer for WTO accession would increase the U.S. trade deficit with China by only $1 billion dollars.[ii] In reality, the trade deficit with China skyrocketed by $167 billion between 2001 and 2008.[iii] Although China’s WTO accession alone (and the favorable trade treatment that came with it) likely did not cause the entirety of the huge rise in the trade deficit with China, it almost certainly contributed more than $1 billion dollars to the rise in the deficit. The USITC should indeed provide caveats that show that its own predictions have been overly optimistic.

Also, in the past, the USITC has not urged us to ignore its model results when its model has predicted an improved trade balance under an FTA. Its study of the Central America Free Trade Agreement (CAFTA), which used the same type of model as the Korea FTA study, predicted that the overall U.S. trade balance would improve as a result of the trade pact.[iv] The CAFTA study did not urge its readers to ignore its predictions of changes in imports and exports as the Korea FTA study does. Indeed, the CAFTA study calls attention to the change in the trade balance.[v] CAFTA proponents from both parties seized on this fact. We should focus on the actual quantitative results of the study, rather than the needless editorial caveat that could apply to any imperfect model of the economy, especially since the caveat is appearing long after the USITC has adopted this technique for evaluating trade agreements.

Lastly, the Korean Embassy’s ostensible concern about the sanctity of the USITC’s findings is belied by the Embassy’s twisting of the quantitative results of the study to claim that the agreement will create 70,000 jobs.[vi] The 70,000 jobs figure does not come from the USITC study (which assumes that the number of jobs does not change). The Embassy has apparently applied a standard jobs multiplier from the U.S. Department of Commerce to the value of the USITC’s estimate of a change in bilateral U.S. exports to Korea. The figure the embassy has created does not include imports – or the net impact – much less use the appropriate data with respect to how the U.S. would be affected. That would be the ultimate effect of the FTA on the U.S. global trade balance – an increased deficit and the related negative impact of imports on jobs. Put simply, the Embassy should not be in the business of splicing two completely distinct methodologies – one from the USITC, and one from the Department of Commerce. But if the Embassy is going to engage in such illegitimate splicing, it should at least be consistent. Since the USITC predicted a greater deficit with the Korea FTA, a proper accounting of the impact of exports and imports would find a net job loss from the FTA.

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[i] U.S. International Trade Commission. “U.S.-Korea Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects.” USITC Publication 3949. September 2007, Corrected printing March 2010, at 2-14, Table 2.3, Available at: http://www.usitc.gov/publications/332/pub3949.pdf

[ii] U.S. International Trade Commission, “Assessment of the Economic Effects on the United States of China’s Accession to the WTO,” August 1999, at xi.

[iii] Trade flow data from the USITC DataWeb. Deficit calculated on a domestic imports minus imports for consumption basis. Figures inflation-adjusted to 2009 using the CPI-U-RS.

[iv] U.S. International Trade Commission. “U.S.-Central America-Dominican Republic Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects,” USITC Publication 3717, August 2004, at 76, Table 4-5, Available at: http://www.usitc.gov/publications/332/pub3717.pdf

[v] On page 76, it states that, “The changes in trade arise from trade balance, changes in demand, and factor supply.”

[vi] Adolfo Guzman-Lopez, “Korean ambassador stumps in LA for free trade agreement,” Southern California Public Radio, Jan. 25, 2011, Available at: http://www.scpr.org/news/2011/01/25/korea-trade-feature/

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