U.S.-ROK military cost-sharing negotiations: a history and lessons for the future
U.S. should remember the alliance's strategic value when pursuing the 11th SMA deal
The United States and South Korea are gearing up to start negotiations for the latest version of their alliance cost-sharing agreement, the deal that helps America defray the costs of basing 28,500 troops in Korea.
The last such arrangement – the 10th Special Measures Agreement (SMA) – was signed on March 8, 2019. It allowed for an 8.2% increase in South Korea’s contribution. The one year agreement was much shorter than previous agreements, which tended to cover 3-5 year periods.
The current SMA expires on December 31, but it can be extended in case a new agreement isn’t completed on time.
Arriving at the 11th SMA’s signing ceremony will be a process — the last two agreements required over ten meetings, and went into “extra innings,” with agreements finalized after the previous deal expired.
The U.S. is pushing for South Korea to increase its contribution, and South Korea’s Presidential Office and Foreign Ministry have both stressed the need for a “reasonable and fair” agreement. The issue even came up during President Trump and President Moon’s meeting on the sidelines of the UN General Assembly last week.
Cost-sharing negotiations have historically been frank, complicated, multi-round discussions. It is unlikely that the 11th SMA will be an exception.
Evolution of a partnership
Although the U.S. and the Republic of Korea (ROK) have been treaty allies since 1953, it wasn’t until 1966 that the first Status of Forces Agreement (SOFA) was signed following a long series of negotiations.
It could be said that cost-sharing practices preceded the outbreak of the Korean War in 1950, as Korea provided land and facilities to the U.S. military since their arrival in 1945.
However, the 1966 SOFA codified the ROK’s commitment to provide cost-free access to facilities and areas like ports and airfields. In the 1970s, cost-sharing practices expanded to include the provision of ammunition and combined defense improvements.
In the late 1980s, Congress called for an increase in alliance burden-sharing. Korea and the U.S. reformulated the cost-sharing arrangement by adding a periodically updated Special Measures Agreement (SMA).
The SMA covers three major categories — labor, logistics, and construction. Much of the funds are used to pay South Korean employees and vendors for services in support of the combined military presence and operation.
The U.S.-ROK alliance — now over 65 years old — is the lynchpin of security in the Asia Pacific.
What began as a fundamentally military-to-military relationship has blossomed into a robust, multi-dimensional partnership between two democratic economic powerhouses. As competition with China heats up, the region will only grow in strategic significance.
So why have these discussions been so fraught?
Two central dynamics are at play, one concerning security and the other concerning economics. The entrapment-abandonment dilemma — explained here by Georgetown Professor Victor Cha — describes a situation in which the major partner in an alliance fears getting dragged into conflict and the minor partner fears abandonment.
This is why it’s important for the U.S. to continue signaling unwavering commitment to Korea’s defense. At the same time, it also makes sense for America to pursue favorable economic terms, and herein lies the source of tension, as bargaining can sometimes produce abandonment anxiety.
To see this dynamic at work, we can turn to the South Korean Ministry of Foreign Affairs’ media announcement of the 10th SMA’s signing. With regards to the entrapment-abandonment dilemma, it notes: “The U.S. reassured its firm commitment to the defense of the ROK while making it clear that the U.S. is not considering making any changes to the size of USFK.”
With regards to the economic component, it notes that “although the U.S. spoke highly of the ROK’s contribution for the alliance, it demanded the ROK to significantly increase the total amount of contributions corresponding to the ROK’s national status and economic power.”
With that context in mind, how can we analyze Korea’s SMA contribution in a fair and objective manner?
Measuring the trends
There are a number of ways to assess the trendlines of Seoul’s SMA contribution. In addition to comparing it to changes in Korea’s gross domestic product (GDP), we should also look at changes in the consumer price index.
SMAs are typically drafted to cover multi-year time periods. The contribution amount for the first year is determined at a fixed rate. Subsequent years are calculated by increasing the base year’s amount by the inflation rate (determined by the consumer price index). Such a comparison allows us to gauge whether or not the contribution is keeping up with (or surpassing) inflation.
The South Korean economy boomed over the past two decades. GDP expanded by five times between 1991 and 2018.
Over this time, Seoul’s contribution to hosting U.S. forces also increased substantially. From a starting base of 107.3 billion Korean Won, it surpassed the one trillion won mark in 2019.
By comparing the uptick in SMA contribution to fluctuations in the consumer price index, we can get a balanced sense for the scale of the overall increase. As the below graph illustrates, since 1991, Korea’s SMA contribution shot up by a full order of magnitude, while inflation increased by only about 2.5 times.
Korea’s self-defense capabilities have developed markedly over the same time span. Germane to our discussion, the defense budget has grown from about 7.5 trillion won in 1991 to a planned budget of 50 trillion won in 2020.
If we compare annual percent increase, we can see that defense spending began to accelerate at a slighter higher rate than SMA contributions starting in the mid-2000s.
It comes as no surprise that Korea’s cost-sharing contributions are dwarfed by its defense expenditures. The relationships between these two figures is a dynamic one, as illustrated by the below graph.
In 2019, the SMA was a little over one trillion won, while the defense budget was about 46.7 trillion won, meaning that the cost-sharing contribution was 2.23% the size of the defense budget. The last time the SMA contribution was so small a proportion of the defense budget was 1997, when it was 2.1%.
On the high end, the SMA was 3.9% the size of the defense budget in 2004. The below graph shows the general trend, a gradual increase starting in 1991, reaching a high point in 2004, followed by a gradual decrease as the defense budget’s growth rate accelerated and the SMA’s rate slowed.
So what happened?
The data show that the largest SMA increases come from new negotiations, but that recent deals have resulted in more modest increases.
The 2009 agreement resulted in a slight rise from 741.5 billion won to 760 billion won — a 2% increase. The 2014 agreement yielded a larger 6% increase, but then meager inflation dragged down further growth.
The 10th SMA, signed in 2019, resulted in an 8% bump. This is large when compared to increases set by the four prior agreements, but not when compared to the agreements from 1994-2002, as demonstrated below.
What explains the big jumps in the early years? The time period that saw the greatest increases in SMA contribution also saw greater overall economic growth.
Between 1992 and 2004, the average annual GDP growth rate was 17% and the average annual SMA increase was 6%.
Between 2005 and 2018, average annual GDP growth was just 3%, and the average annual SMA increase was correspondingly smaller — at 2%.
What the SMA includes, and what it doesn’t
As mentioned earlier, the SMA contains three broad categories: labor, logistics, and construction.
In terms of labor, according to U.S. Forces Korea Commander General Robert Abrams, “The SMA assures essential readiness-related personnel and activities, such as the contributions of 9,000 Korean National employees serving in crucial roles of public safety, health care, emergency response, and quality-of-life delivery operations.”
With regards to logistics and construction, former U.S. Forces Korea Commander General Vincent Brooks further explained in 2016 that “the logistics cost-sharing program allows for in-kind contribution for supplies and services along ten categories which include munitions storage, equipment maintenance, warehousing, transportation, sustainment services, and base operations support… The ROK funded construction program allocates funding in cash and in-kind construction for military construction to include associated design and project oversight.”
But Korea also contributes in lots of other ways. First, Seoul paid over 90% of the $10.8 billion costs for the new US Forces Korea headquarters in Pyeongtaek. The construction of Camp Humphreys, America’s largest overseas base, took over 10 years.
Korea is one of the world’s largest purchasers of U.S. weapons. President Moon recently told President Trump that Korea has purchased $6.7 billion in weapons from the U.S. over the past ten years.
South Korea’s Defense Agency for Technology and Quality says that this places Korea as the third largest purchaser of American weapons systems between 2008 and 2017, behind only Saudi Arabia and Australia.
In his Congressional testimony, General Abrams explained, “The ROK has invested more in its defense over the past 15 years than it had in the previous 50, increasing foreign military procurements from the United States such as the KF-16 and PATRIOT battery upgrades, AH-64E Apaches, the F-15K, RQ-4 Global Hawk variants, and the F-35A Joint Strike Fighter.”
One of the most critical ways an alliance partner can demonstrate credibility is by spending a sizable portion of GDP on defense. For example, in 2014, NATO members pledged to spend at least 2% of GDP on defense by 2024, but only a fraction have thus far reached that target.
As of 2019, only seven out of twenty-eight countries hit that mark, with the U.S. leading the pack at 3.4%, according to NATO data.
By contrast, Korea spends 2.7%, and has plans to spend 2.9% by 2022, figures that no NATO country currently approximates.
Seoul is also investing in Defense Reform 2.0, is preparing for conditions-based operational control (OPCON) transfer, and plans to harness new technological innovations to support its defense.
So what’s next?
In August, President Trump tweeted that “South Korea has agreed to pay substantially more money to the United States in order to defend itself from North Korea.” It is uncertain precisely what America’s opening ask will be, but press reports give us some sense.
The South Korean newspaper Joongang Ilbo reported that former National Security Advisor John Bolton told Seoul the U.S. is asking for $5 billion, citing unnamed diplomatic sources. Prior to the negotiation of the 10th SMA, the Wall Street Journal reported that the U.S. was asking Seoul to double its commitment or increase it by 1.5 times, citing “people familiar with the talks.”
Other reports indicated that the Trump administration is interested in securing Cost Plus 50 from its allies, including Korea, Japan, and Germany. Under such a plan, allies would pay for the total stationing cost of hosting U.S. troops, plus an extra 50%.
According to one analysis, applying the Cost Plus 50 formula to Korea would result in a 122% increase from its current commitment, far exceeding the historic high increase of 25.7% set in 2002.
Congress steps in
Our present understanding is limited by the amount of information available. But that might change soon.
The 2020 National Defense Authorization Act contains a section (Sec. 1244) requiring the Secretary of Defense to issue a report on direct, indirect, and burden-sharing contributions by South Korea and Japan. The report must be issued in unclassified form to the relevant congressional committees by March 1, 2020.
The report will shed new light on burden-sharing practices. It will be more exhaustive and specific than anything currently available in an unclassified setting.
Importantly, it will distinguish cost-sharing contributions by category, including: labor, logistics, facilities, fees, construction, and in-kind payments. This breakdown will make it easier to compare the contributions of different allies, since we will be able to compare apples to apples.
In addition, the Secretary of Defense would also be required to release figures pertaining to costs incurred by the U.S. for basing troops in Korea and Japan — including personnel, construction, relocation, and maintenance. This information will give us the clearest picture yet of how cost-sharing works on the ground level.
Closing words from General Mattis
In his new memoir, Former Secretary of Defense General James Mattis explains the deeper significance of America’s alliances.
He writes, “The example of South Korea is instructive. Since the cease-fire in 1953, we have kept tens of thousands of U.S. soldiers there. Our large troop presence and steady diplomacy safeguarded the transformation of that war-torn country from a dictatorship into a vibrant democracy. But it took forty years.”
Strategic investments take decades and yield strategic returns, not dollars. Few of America’s investments have paid off as handsomely as Korea.
Considering that the global center of gravity is shifting back towards Asia — a region that is also host to China, America’s principal strategic competitor — the U.S. alliance with Korea will only grow in value and utility.
When asked about the SMA negotiations, Former U.S. Ambassador to Korea Mark Lippert recently said, “South Korea is not a free-rider and really are very, very strong allies, especially in the context of burden sharing.”
On the nuances of negotiation, Lipper added that, “We should always consult each other in a way that leaves us stronger as an alliance over time.”
Pursuing an advantageous economic arrangement for the benefit of America’s taxpayers is perfectly reasonable, but it also makes sense to keep Mattis’ and Lippert’s points in mind.
Edited by James Fretwell
Featured image: U.S. Pacific Command
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