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This podcast discusses a paper by Kadee Russ, from the University of California Davis, titled ‘Trade diversion and Trade deficit: the case of the Korea-US free trade agreement’. The paper questions whether KORUS, the 2012 trade deal reducing tariffs on imports and exports between the two countries, had wider implications for the wider trade deficit occurring in the US. The paper discovers that US imports reduced from countries other than South Korea by the same amount that the US bilateral trade deficit with South Korea was widening by 2014. This would imply that imports were being diverted from other countries to South Korea. The question is, could this have happened without the trade deal? Russ persuades Keynes and Bown that KORUS did not seem to add through its tariff changes to the US trade deficit. Rather, the trade deficit is due to macro fundamentals.
Why does this matter? The Trump administration is currently trying to reduce this bilateral trade deficit and it is now essential to question how important KORUS really is in the US’s current trade surplus. Yet, there are trade models that argue that aggregate trade deficits will not necessarily change due to changes in tariffs.
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