Trump preparing withdrawal from South Korea trade deal

President Donald Trump has instructed advisers to prepare to withdraw the United States from a free-trade agreement with South Korea, several people close to the process said, a move that would stoke economic tensions with the US ally as both countries confront a crisis over North Korea's nuclear weapons program.

Withdrawing from the trade deal would back up Trump's promises to crack down on what he considers unfair trade competition from other countries, but his top national security and economic advisers are pushing him to abandon the plan, arguing it would hamper US economic growth and strain ties with an important ally. Officials including national security adviser H.R. McMaster, Defense Secretary Jim Mattis and National Economic Council director Gary Cohn oppose withdrawal, said people familiar with the process who spoke on the condition of anonymity to discuss internal White House deliberations.

Although it is still possible Trump could decide to stay in the agreement to renegotiate its terms, the internal preparations for terminating the deal are far along, and the formal withdrawal process could begin as soon as this week, the people said.

A White House spokeswoman said "discussions are ongoing, but we have no announcements at this time."

Rolling back free-trade agreements was a top priority of some of the senior members of the Trump administration who have left in recent weeks, including former chief strategist Steve Bannon. Bannon often found himself outmaneuvered internally by Cohn and others who aligned with business groups to warn of the economic consequences of withdrawing from trade deals, but Trump's pursuit of terminating the South Korea deal appears to demonstrate the president's personal commitment to reverse US policymakers' long-standing pursuit of free trade.

Trump has threatened before to withdraw from trade pacts only to pull back, but his threat to South Korea comes as the two countries look to create a united front against North Korea at a time when military tensions are at their highest level in years.

As if to underscore the point, North Korea said Sunday that it had developed a more advanced nuclear bomb with "great destructive power," releasing photos of Kim Jong Un inspecting what it said was a hydrogen bomb that could be attached to a missile capable of reaching the mainland United States.

All the components of the "H-bomb" were "homemade" so North Korea could produce "powerful nuclear weapons as many as it wants," the state-run Korean Central News Agency quoted Kim as saying.

North Korea's latest pronouncement could not be verified. It claimed that a nuclear test in January last year was of a hydrogen bomb but experts said the seismic waves generated were consistent with an ordinary nuclear device, not a thermonuclear one.

The US-South Korea deal, which was reached in 2007 and went into effect in 2012, reduces trade barriers between the two countries. Proponents say it gives US companies more access to the wealthy South Korean economy, but critics charge that South Korea has reaped a greater share of the benefits of the deal, an allegation Trump has personally echoed multiple times since his election while calling for changes to the deal.

South Korea elected a new president, Moon Jae-in, in May, and Trump has been frustrated that Moon is not willing to accept the initial US trade demands, several trade experts said. Foreign leaders at first worked hard to build strong relations with Trump, but there has been a marked change in recent months as numerous leaders have stood up to his brand of nationalism.

South Korean President Moon Jae-in. Photo / AP

South Korean media have been telling trade representatives in Seoul to stand their ground against the United States in the renegotiations.

"The North Korean nuclear crisis is pushing tension on this divided peninsula to new highs," the Korea Times wrote in an editorial. "But that should be no reason for Seoul to put its economic interests far behind security matters, weakening its bargaining leverage and playing into the hands of the US leader, the self-styled 'artist of the deal.' "

Trump is "playing with fire," said Gary Schmitt, co-director of the Marilyn Ware Center for Security Studies at the American Enterprise Institute. "There is a new president in South Korea whose instincts probably are to be probably not as pro-America as his predecessor, and now you are putting him in a situation where he has to react. In fact, what you need now is as much cooperation as possible."

White House advisers are trying to stop Trump from withdrawing from the South Korea free-trade agreement in part because they do not want to isolate the government in Seoul during a perilous time on the Korean Peninsula. North Korea has become increasingly adversarial with its missile program, testing nuclear weapons and firing missiles over Japan in a way that has alarmed the international community.

Wendy Cutler, who was the chief US negotiator for the free-trade agreement, said the prospect of canceling the deal could not come at a worse time.

"If not handled carefully, the latest impasse could lead to renewed trade tension between the US and Korea," she wrote in the Hill this week. "It also takes place at a time, after exceedingly threatening North Korean missile tests, when the bilateral alliance could not be more important."

South Korea is the sixth-largest goods trading partner with the United States, accounting for $112.2 billion in two-way trade last year, according to the US trade representative. US companies exported $42.3 billion in goods to South Korea and imported $69.9 billion in goods last year, leaving a trade deficit of $27.7 billion.

Trump and Moon spoke on the phone late Friday, but a readout of the call provided by the White House referenced only national security issues and did not mention the escalating trade dispute.

If Trump withdraws from the agreement, he could try to force South Korea to import more US products with little to no import restrictions, something he believes will help US companies and workers. South Korea could also decide to refuse any discussions with Trump, kicking off a trade war between the countries.

Withdrawing from the deal could lead to a large increase on tariffs levied against products the United States imports from South Korea, such as electronics, cellphones and automobiles. South Korea would also immediately start charging very high tariffs on goods and services imported into its country. Chad Bown, who served as an economist in the White House during the Obama administration, said the tariff the US government charges against many Korean imports would rise from 0 to 3.5 percent. The tariff South Korea charges against US imports would rise from 0 to almost 14 percent, making it harder for US companies to find buyers there.

The Pentagon referred a request for comment to the Commerce Department, which did not respond. Trump's consideration of starting the process to pull out of the deal was first reported by Inside US Trade.

In July, US Trade Representative Robert Lighthizer revealed some of Trump's complaints with the South Korea deal during a special session that was called in an attempt by the White House to begin renegotiations.

Lighthizer said at the time that since 2012, the US "trade deficit in goods with Korea has doubled from $13.2 billion to $27.6 billion, while US goods exports have actually gone down. This is quite different from what the previous Administration sold to the American people when it urged approval of this Agreement. We can and must do better."

South Korea, though, has so far refused to renegotiate the trade deal.

In an April interview with The Washington Post, Trump called the agreement "a horrible deal" that has left America "destroyed."

"With the Korean deal, we terminate and it's over," Trump told The Post in that interview.

Trump has expressed widespread frustration that he has not been able to follow through on campaign promises to rip up trade deals he argues have disadvantaged US workers. He came close several months ago to starting a withdrawal from the North American Free Trade Agreement, but he stopped short after intense lobbying by advisers and the business community.

But in recent days, he has said he might still withdraw from NAFTA, accusing Mexico in particular of refraining to offer concessions during negotiations.

Trump has said many countries that export more goods to the United States than they import are fleecing US workers and consumers.

The US-South Korea free-trade agreement, known as KORUS, allows the United States to terminate it after six months if it wishes to. So if Trump signed a letter to withdraw from the agreement, the deal would effectively be terminated in March 2018. KORUS was approved by Congress, but Trump could to pull out of the agreement on his own.