This is the Korea Times op-ed article written by the ECCK President Christoph Heider.
Trade balance – not best way to evaluate FTAs
The U.S. administration has announced it wants to renegotiate the Korea-U.S. free trade agreement (KORUS FTA) as the trade deficit with Korea is at an unacceptable level. This somehow comes as déjà vu as we had the same discussion with the Korea-European Union free trade agreement (KOR-EU FTA) when a Korean surplus turned into a deficit after the deal was implemented in 2011.
To be frank, I am surprised about this discussion. Is the trade balance the only thing that matters in evaluating the effectiveness of an FTA? I don’t think so. FTAs are negotiated and ratified when it makes economic sense, when economies are supplemental, when one economy can provide added value to the other economy. In economics this is called “comparative advantage.
What puzzles me is that the public discussion seems to focus to a high extent on the trade in goods balance. Trade is not limited to products but also includes services, which take up a substantial share of the trade. But even this indicator doesn’t provide a complete picture. Companies do not only produce goods in their home country; multinational corporations have set themselves up over the recent past in a worldwide network of production sites.
Trade in products that originated outside of the territory of any party to an FTA is not considered at all in the trade balance measurement for each specific FTA. It is indirectly considered in the current account balance when dividends are paid from a subsidiary to its holding company. Also not included in the trade balance itself is foreign direct investment. So if an FTA is purely valued in monetary terms, then at least the current account balance including other financial transactions should be used as a key performance indicator.
In economic theory, a negative trade balance can exist only temporarily. The nation with a trade deficit will experience a devaluation of its currency, which will make its products and services more price competitive, whereas the trading partner with a surplus will see its currency appreciated, therewith increasing the price for its products.
There is a constant change of supply routes and suppliers, but even more important, new companies and new products and services are launched every day, resulting in constant change in trade account balances. Some of those new players will make an impact on trade relations in the foreseeable future. Instead of implementing measures restricting free trade, it is more important to foster and nurture innovation to create and shape the future.
The effectiveness of an FTA should not be valued only in monetary terms. An FTA provides access to a more diversified range of products and services and spurs competition, leading to more innovation and decreased prices.
Naturally, each FTA needs to undergo a constant review and amendment procedure to ensure that it still reflects reality in our fast-changing world. A nation should be confident in terms of its economic policy and economic performance. Confidence means to believe in the power and success of its companies. A restriction is the wrong way. Instead, the extension of free trade and increased cooperation is the way to go.
Please click here to access President Heider’s final article.