A free trade agreement between South Korea and Central America appears to have hit a snag. Earlier this month, the Guatemalan Ministry of Economy postponed bilateral talks between his country and South Korea over concerns from the Guatemalan business sector.

This is not the first time that negotiations between Guatemala and South Korea have had difficulties.

The first round of negotiations between South Korea, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama began in the summer of 2015 after the six Central American countries agreed to negotiate a free trade agreement (FTA) with South Korea as a bloc. At that time, Guatemala was a late signatory of the negotiation framework.

Between 2015 and November 2016, several rounds of negotiations took place over issues such as rules of origin, tariff reduction schedules, and exclusions. After the seventh round of negotiations in November of 2016, five countries were able to reach an agreement with South Korea, the exception being Guatemala. At the time, the Guatemalan Ministry of Economy said in a statement that Guatemala would negotiate bilaterally with South Korea in order to reach an agreement.

While both countries continued bilateral talks to hammer out the remaining details, they were ultimately not able to come to an agreement. On March 30, just a few weeks after the other Central American countries initialed a finished FTA, the Guatemalan Ministry of Economy released another statement saying that his country was not yet ready to sign the FTA with South Korea.

The Deputy Minister of Integration and Foreign Trade, Enrique Lacs, stated that “we have not yet reached a consensus on issues of market access and rules of origin, we have actively participated in the negotiation process and we seek to reach a favorable and balanced agreement that will increase the employment opportunities generated by the national productive sector. ”

“Guatemala is a small and open economy, we have more than 14 commercial agreements in force, but we must be cautious in what we negotiate, defend the interests of the country and level the asymmetries we have with an economy like Korea,” said Deputy Minister Lacs.

As El Periodico reported on June 1, the Chamber of Industry in Guatemala had concerns related to several industries, including metallurgy and footwear. Guatemala postponed further negotiations with South Korea until 2018.

While this is a setback, it is likely that Guatemala will eventually sign onto the FTA since trade with South Korea is becoming more and more important to Guatemala and the region.

Trade

Trade between South Korea and Central America has grown tremendously in recent decades. In 2016, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama had a $1.6 billion trade deficit in goods with South Korea with $1.1 billion attributed to Panama alone.

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Data are from UN COMTRADE
Screenshot (155)
Data are from UN COMTRADE

The recent fall in the value of exports from Central America can be partially attributed to the decline in commodity prices in the second half of 2014. This is especially so for Guatemalan exports to South Korea, which are primarily raw or semi-processed goods.

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Data are from UN COMTRADE

While the setback in negotiations with Guatemala is unfortunate for both nations, a greater threat to South Korea’s export economy may come from the new administration in the White House.

The Trump Problem

South Korea is a strong proponent of free trade. It currently has 16 bilateral and multilateral trade agreements in effect including with Canada, Chile, Colombia, Peru, and the United States. Currently, it is negotiating 10 additional trade agreements including with Central America, Ecuador, and Mexico. As South Korea is expanding its economy through trade agreements, the United States appears to be backtracking on decades of liberal trade policy.

Donald Trump’s rhetoric towards trade has always been openly hostile, especially to countries like China and Mexico that have a trade surplus with the United States. This hostility, including towards South Korea, began well before he officially decided to run for president.

His belief that trade is a zero-sum game runs contrary to a fundamental principle of economics: when two countries trade freely, both countries benefit. In line with that belief, one of his first actions as president was to remove the United States from the Trans-Pacific Partnership (TPP), thereby killing what would have been the largest multinational trade agreement in history.

More recently President Trump has turned his sights towards existing FTAs. In May, his administration started the process to renegotiate the North American Free Trade Agreement (NAFTA).

Negotiations between Canada, Mexico, and the United States to renegotiation NAFTA can start as early as August. At the moment, it is unclear what President Trump’s specific goals will be. However, it is very likely that at least some of the points of contention will include issues that would have been updated by the TPP.

Like China and Mexico, South Korea has a trade surplus with the United States, which seems to be enough of a reason to place the Korea-United States Free Trade Agreement (KORUS) in the administration’s crosshairs.

Recently, President Trump has signaled that he wants to renegotiate KORUS and is willing to terminate the agreement if necessary. As the Washington Post reported in April, while President Trump was railing against KORUS at home, Vice President Mike Pence was in Seoul arguing that the agreement “tilts the playing field against American workers and American growth.”

President Trump’s hostile rhetoric towards a significant economic and military ally has not gone unnoticed by the Congress. In a June 23 press release, senior members of the Senate Foreign Relations Committee reaffirmed their belief that the United States should maintain a close and productive relationship with South Korea, especially given the recent increase in hostile activity by North Korea.

Unfortunately for South Korean exporters to the US and the members of Congress that support KORUS, under the treaty the President has significant leeway to terminate the free trade agreement.

The hostile attitude that the Trump administration has shown towards trade should be a wake-up call for the United States’ traditional economic partners. While it appears that the Central American Free Trade Agreement with the United States is off President Trump’s chopping block, countries in Latin America should be looking outward.

While trade between the nations of Central America and South Korea is still relatively small, an FTA will provide Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama an additional avenue of economic growth.

Donald Trump’s presidency has rocked a traditionally stable tenant of US economic and foreign policy. Traditional economic partners of the United States in Latin America and the Caribbean must redouble their efforts to diversify their economies and their trading partners. As South Korea seeks to expand its trade network, countries in the Americas should take advantage of the opportunity.