[Market Pulse] Future U.S. Tariff Negotiations and the Prisoner's Dilemma

It is fortunate that the first summit between President Lee Jaemyung and U.S. President Donald Trump has led to an improvement in South Korea-U.S. relations. However, most evaluations point out that it is regrettable the tariff negotiations have not yet been concluded. Kang Hoonshik, Chief Presidential Secretary, stated that it was determined to be better to continue discussions in the future rather than rushing into a bad agreement. He also described ongoing negotiations as the 'new normal.'

So, what should be South Korea's strategy for future tariff negotiations with the United States? In conclusion, South Korea and Japan, which share the same position, must cooperate closely and respond jointly to avoid falling into the 'prisoner's dilemma.' The United States is well aware of the competitive psychology between South Korea and Japan and has long leveraged this in tariff negotiations.

Since the tariff negotiations began in earnest last April, the United States has sought to prevent the counterpart countries from coordinating and forming a united front. In other words, it has exploited the 'prisoner's dilemma' scenario. The U.S. has threatened that countries reaching an agreement first could expect favorable outcomes, but those negotiating in bad faith would face severe disadvantages, thereby intimidating the other parties.

In this situation, the country that ended up with the worst hand was Japan. Seeking to replicate former Prime Minister Shinzo Abe's success during Trump's first term, Prime Minister Shigeru Ishiba entered negotiations with the United States first, aiming for a complete elimination of tariffs. However, because he insisted on targets that did not align with Trump's vision, the U.S. side rejected the proposal. After losing the House of Councillors election, Prime Minister Ishiba was cornered and needed to conclude the tariff negotiations with the United States. Ryosei Akazawa, Minister for Economic Revitalization and chief negotiator, appealed to Secretary of Commerce Howard Lutnick, who had been sidelined in the tariff talks, resulting in Trump announcing an astonishing $550 billion investment (fund) in the United States. Politically cornered, Japan ended up in a situation even worse than the prisoner's dilemma. In exchange, Secretary Lutnick secured an exclusive scoop.

The United States claimed that it would decide the investment destinations of the $550 billion fund at its own discretion and that it would take 90% of the profits. Japan could neither affirm nor deny this. Under these circumstances, Japan could not comply with the U.S. demand for documentation. It was judged politically preferable to leave the matter ambiguous without documentation. As domestic criticism and backlash grew, Japan reversed its position last week and decided to consult with the U.S. side on the details of the agreement. To this end, Minister Akazawa, who was scheduled to visit Washington, D.C., abruptly canceled his trip. It is presumed that South Korea's response influenced this decision. Instead, working-level officials were sent for preliminary discussions.

Three hours before the first South Korea-U.S. summit, President Trump referred to 'purge·revolution' messages on social media, as well as church raids and U.S. military searches, delaying the summit. Behind this, the U.S. likely sought to pressure South Korea, aiming to secure documentation for South Korea's $350 billion investment in the United States. If South Korea documents its investment, Japan would inevitably have to do the same. This would complete Secretary Lutnick's vision of creating a '$900 billion economic security fund,' as mentioned in the media, to be used for U.S. infrastructure development. However, it is impossible for South Korea and Japan to bear such astronomical obligations.

The European Union documented a pure business investment of $600 billion through a U.S.-EU joint declaration, while only South Korea and Japan agreed to fund-type investments in the United States. Including business investments of $150 billion, South Korea's total investment in the United States amounts to $500 billion, which is not much different from Japan's $550 billion, and both countries essentially share the same position on other trade issues as well.

South Korea and Japan must avoid falling into the 'prisoner's dilemma' that the United States may attempt to create through documentation. Now that the interests of the game have been made public and the two countries have similar positions, sharing information properly will alter the negotiation structure. In many respects, the European Union conducted smooth negotiations with the United States. South Korea should conduct a thorough analysis of those negotiations and seek joint response measures together with Japan.

Jung Ingyo, Professor of International Trade at Inha University (former Chief Negotiator for Trade)