U.S. - Korean Economic Relations in the Age of the Pacific Basin


Paper presented at Western Governor's
Conference, Honolulu, Hawaii, June 16, 1978.

The Pacific Basin Economies

               In its widest definition, the term Pacific Basin encompasses all nations that border the world's largest ocean. Under this definition it includes not only North America, East Asia, and Southeast Asia, but also Oceania and those countries of Latin America whose shores are washed by the Pacific Ocean.

The Pacific Basin is home for half the world's population. In this region one finds the world's leading producers and exporters of such important commodities as oil, natural rubber, sugar, nickel, and tin. If one were to look for the latest technology in almost any major field of industry, one could look in the Basin first, and chances are that it would be found.

For purposes of understanding the flows of trade, investment, and technology in the region, some 30 Pacific Basin countries may be divided into two principal groups: the five developed countries of Canada, the United States, Japan, Australia, and New Zealand, and the developing countries-the group to which all the rest of the countries belong. Among the developed countries, Japan may be unique in that it represents the only country in the region that has attained the rank of a developed country without asignificant domestic resource base.

Among the developing countries, two subgroups may be distinguished: those countries that are primarily raw material producers, such as Indonesia and Malaysia, and those that are principally light manufacturers, such as Korea, Taiwan, and Hong Kong. The former are usually limited in both capital and skilled manpower, while the latter are usually limited in natural resources and sometimes capital.

The great diversity among the Pacific Basin countries in terms of factor endowment and development stages presents those countries with unsurpassed opportunities to engage in a division of labor based on their respective comparative advantages. For the participants of this conference, it is worth emphasizing that the division of labor among the Pacific Basin countries has progressed to a greater degree than generally has been realized. With a few minor exceptions, the Pacific Basin countries already trade far more with each other than with the countries outside the Basin. For the Pacific Basin countries, the intra-Basin share of trade typically exceeds 60 to 70 percent.

It should not be inferred from these facts, however, that the great potential for rapid growth through expanded trade or other forms of economic cooperation among these countries has approached exhaustion. If anything, the potential has barely been tapped, due in large measure to the absence of workable political settlements in many parts of this region after World War II. Once some of these countries achieved a degree of political stability, their growth rates began to accelerate. Since 1972, the five ASEAN countries have registered average annual growth rates of over 7 percent. In the last year or two these countries, as a group, have actively sought external help and assistance to stimulate their growth.

It is well known that the Pacific Basin includes several countries that have been among the top in growth rate in the world since World War II-Japan, Korea, Taiwan, Hong Kong, Singapore, Mexico, and Ecuador. Together with the high growth rates of the ASEAN countries, the nearly 10 percent growth rate for these countries as a whole, lasting more than 15 years, truly has made the Pacific Basin one of the most dynamic regions in the world. This is indeed one reason why now so many professional economists and other knowledgeable observers, including the chairman of this conference, have heralded the New Age of the Pacific.

My country, Korea, has long considered itself fortunate to have had the opportunity to develop a close economic relationship with one of the largest and most progressive countries in the region, the United States. We consider this relationship to be one of the pillars that will support our efforts to strengthen ties with other Pacific Basin countries. For this reason alone, it is certainly well worth our time to review and assess Korea's current trade and other economic relationships with the United States.

The Prospect for Greater Economic Cooperation

At the beginning of Korea's First Five-Year Plan in 1962, the volume of U.S.-Korean two-way trade was $232 million. By 1977, it has risen to $5.6 billion. An indication of the accelerating pace of this trade is the fact that, of the total of some $26 billion in current dollar terms transacted since 1962, almost 90 percent has taken place since 1970, and more than half in just the past three years. Furthermore, it has been an almost equal movement in both directions, with the United States having a slight export balance in its favor over the period as a whole.

We are aware, of course, that in the last two years the balance of trade has been somewhat in Korea's favor, and that this, together with even larger imbalances in U.S. trade with other countries, has caused domestic concern. Measures have been taken on our part, however, to which I will refer shortly, that should reduce Korea's share in this imbalance.

The highly complementary nature of trade between the United States and Korea is readily apparent in the commodity mix. The major U.S. exports to Korea are such land-intensive or natural resource-intensive commodities as wheat, corn, raw cotton, wood, pulp, waste paper, and scrap iron, and such high-technology products as engines, machinery, generators, and airplanes. In turn, Korea sells to the United States mostly labor-intensive manufactured products, including textiles, plywood, footwear, electronics, and certain types of steel. The benefits of this trade in terms of added income, price stability, employment, and growth for both countries have been enormous.

With regard to the prospect of this trade, I should note that Korea's total imports are expected to rise to $13.5 billion this year, an increase of 25 percent over last year. To a large degree, this marked increase is due to a series of import liberalization measures taken by my government in the course of the past 14 months. In 1977, my government removed some 228 items from the list of commodities requiring import licenses. These 228 items represented over 10 percent of our total imports at that time. The government also drastically simplified the import license application procedures for the commodities remaining on the list, and discontinued the practice of restricting imports to end-users. Effective May 1 this year the government removed another 133 items from the list of commodities requiring import licences. It also announced a time schedule for removing an additional 188 commodities from the list. Since the announcement, the government has accelerated this time schedule.

The imports from the United States that are expected to be most favorably affected by these liberalization measures include such chemical products as propyl alcohols and polymerization products, leather, wire rod, steel sheets and plates, and excavating machinery.

During the Fourth Five-Year Plan period, which started last year, Korea is placing a great emphasis on developing technology and skilled intensive industries, including shipbuilding, machinery, electronics, and petrochemicals. Development of such industries necessitates importation of capital goods on a large scale. The relative importance of these imports, which already account for more than a quarter of Korea's total imports, should rise accordingly. Until very recently, a substantial portion of Korea's capital goods has been imported from Japan, but with the current appreciation of the yen, the United States now has an opportunity to increase its share of the import market for these goods in Korea.

With the continued growth of the economy, Korea's energy needs will soar. Korea intends to meet a large part of the growing demand for energy in the form of nuclear power. Thus the country will need to import not only additional nuclear power plants and uranium enrichment services, but also substantial amounts of bituminous coal for industrial use.

In recent years Korea has imported approximately $1.1 billion worth of agricultural commodities a year from the United States, including cotton, wheat, soybeans, and corn. For the foreseeable future these import needs will continue. Furthermore, as the standard of living rises in Korea, there will be additional new demand for foodstuffs of a high nutritional value.

Considering that virtually all these import needs represent the areas in which the United States enjoys considerable advantages in comparison with other countries, one cannot help thinking that, in the foreseeable future, the United States should be able to maintain its share of Korea's total imports at the present level of about 23 percent.

Looking farther still into the future, I want to emphasize that, according to a recent 15-year projection, the Korean economy will continue to grow at the rate of about 10 percent per annum during the 1977-1991 period. Korea's exports will grow at 14.6 percent per annum, while imports will grow at 14.3 percent per annum during this period. On this basis, Korea's import volume at the 1975 constant price is expected to reach $64 billion in 1991. Korea's imports then will amount to approximately 2 percent of projected world trade, compared to the slightly less than 1 percent for 1977. With a 2 percent share, Korea is expected to rank near or among the top ten trading nations in the world.

Loans and investments have been another important area in which economic cooperation between the United States and Korea has been close, particularly since 1959, when official U.S. aid to Korea began to be reduced drastically. Between 1959 and 1977, Korea induced $3.3 billion in loans and $165 million in direct investments from the United States, accounting for almost one-third of the total foreign loans and investments Korea attracted during this period. This large amount of loans and investments served to close the gap between domestic savings and investment levels. In so doing, they contributed not only to productivity improvement in Korea, but also high income to investors in the United States.

The prospect for greater cooperation between our two countries in this area is also promising. It is true that Korea attained a modest current account surplus last year. That does not mean, however, that Korea's need for imports of capital will be any less in the foreseeable future. The reason is very simple. It is the policy of my government to continue to raise the level of total domestic investment above the domestic savings level. We pursue this investment policy not only to take advantage of the high marginal productivity of capital in Korea but also to keep expanding employment opportunities for Korea's labor force, which is still growing at 3 percent per annum. Because my government is committed to this policy, it is safe to assume that Korea's capital import requirement will continue at the level of approximately $2.5 billion per year during the balance of the current Fourth Five-Year Plan period. It should be further stated that Korea will continue to maintain the favorable climate for foreign investors it has already established.

Science and technology also has been a field in which cooperation between the United States and Korea has been highly beneficial for both countries. In the earlier years, Korea was the beneficiary of a large amount of USAID funds specially earmarked for training and exchange of technical personnel between the two countries. In recent years technical cooperation has increasingly taken the form of licensing agreements and direct investment. To date, 209 technical licensing agreements have been entered into between our countries, and the royalty payments to U.S. firms have totaled more than $46 million. Moreover, 127 American firms have made direct investments in Korea, relying heavily on their own technical know-how. It is interesting to note that the direction of the transfer of skill and technology has not been entirely one way. Currently over 1,500 Korean-born scientists and engineers are working in various research laboratories in the United States, and at least 3,000 Korean-trained medical doctors and dentists are helping to staff numerous clinics and hospitals in the United States.

With respect to the opportunities for greater cooperation in the area of science and technology, I should say the prospects are highly promising. Korea now faces growing competition for its traditional labor-intensive exports from the so-called late starters among developing countries. In order to maintain a competitive edge in export markets, it is imperative that Korea develop high-technology industries such as the ones already mentioned through a rapid introduction of new technology. To this end, my government already is liberalizing foreign exchange payments for technology, and will automatically approve the majority of technological license contracts in the future. In addition, the government encourages not only joint research and the exchange of information and scientific personnel, but also joint ventures, particularly in the fields of energy development and engineering services.

Over and above these traditional areas of economic cooperation between our countries, there is still another important area where our countries can work together to realize immense benefits, not only for ourselves but also for others. I am referring, of course, to the development of the Pacific Basin. As I outlined at the beginning, the countries in the region are now ready to make good use of the kind of assistance our two countries can offer together on the basis of our respective strengths. As an illustration, the United States might supply engineering and marketing experience, while Korea would supply construction and manufacturing services.

As part of such joint efforts for rapid economic development in the Pacific Basin, I would also like to ask this conference to consider the idea of establishing an international research consortium with the participation of leading economic and social research institutes in the region.

For successful implementation of the objectives and the efforts I have just proposed, it would be difficult for the Americans-or for that matter the peoples of any other countries involved-to find better partners than the Koreans. Today we Koreans share common aspirations for rapid growth with the people in the Pacific Basin to an unusually high degree. Furthermore, Korean economic development experience is now increasingly looked upon as the model to follow by the people of many countries in the Pacific Basin.

Lack of Policy Coordination and Rising Protectionism

I could make even bolder proposals, were it not for certain policy conflicts among several major industrial countries and the growing tendency toward protectionism.

Put very bluntly, the macroeconomic policies being followed in several industrial countries are so inconsistent with each other that I cannot help thinking the world has forgotten the lessons it learned from the experience of the 1930s. For the past two years the United States has basically followed an expansionary policy to help with domestic income and employment. In today's highly interdependent world, that policy would have succeeded only if the other major industrial nations, particularly those with external payment surpluses, had simultaneously expanded their economies. For the success of this American policy, the adoption of a workable energy policy package also would have helped.

We all know, however, that these conditions were not met, and as a result what has happened so far is a further aggravation of the domestic price level, a greater deterioration in the U.S. balance of payments position, and the continuing depreciation of the dollar. In view of these developments I sincerely hope that the United States and several major industrial countries will soon agree to take concerted action for simultaneous expansion. Meanwhile, it is also hoped that the United States will adopt a credible energy policy.

Protectionism is now being practiced so widely among both developed and developing countries that I cannot help comparing the new protectionism of the 1970s with the old protectionism of the 1930s. Compared to the old protectionism, the new protectionism relies more heavily on various forms of nontariff barriers. Import quotas, "voluntary" export agreements, antidumping actions, countervailing duties, escape clauses, trade adjustment assistance, employment subsidies, so-called orderly marketing agreements, and industrial cartels are only some of the forms the new protectionism takes. Ironically, some of these devices were originally introduced to facilitate the structural transformation of the economy in the interest of freer trade.

Compared to tariff barriers, nontariff barriers do more harm to the economy that imposes them because they not only misallocate resources against comparative advantages at a point in time, but preclude the structural adjustment of the economy that is so essential for the efficient operation and growth of the economy over time. In addition, nontariff barriers that change what otherwise would be a simple and efficient market transaction into a political bargaining power usually are discriminated against. This was illustrated by the recent textile negotiations involving EC countries and some of the small Asian textile producing countries.

It is bad enough for a developed country to restrict imports from another developed country; it is even worse when it imposes restrictions against imports from a newly developing country. For the newly developing countries to succeed with their developing efforts, access to the markets in the developed countries is essential. In addition, it simply is not true that the recent rise in unemployment in the industrially developed countries was due to the rapid rise in labor-intensive manufactured imports from the developing countries. The share of developing countries' exports in total world manufactured exports or in the total consumption in the developed countries has been minimal. The share of the developing countries in world manufactured exports rose only from 4.1 percent in 1960 to 6.3 percent in 1975. A World Bank study estimates that even in clothing, where the share of the developing countries reached 31 percent of total world exports in 1975, the share in the total consumption of clothing in the developed countries was less than 7 percent in that year.

There is still another fact to consider. The developing countries typically spend a large portion of the foreign exchange earned from their exports on the imports of capital goods from the developed countries. In fact, a GATT report has shown that since the oil crisis of 1973, the manufactured exports from the developed countries to the developing countries were much larger than the manufactured imports from the developing countries to the developed countries. The net manufactured trade balance of the United States with the non-oil-producing developing countries rose from $3.1 billion in 1973 to $5.3 billion in 1975. The equivalent figures for the European Common Market were $11.3 and $16.5 billion, and for Japan $7.7 and $13.2 billion.

All in all, it is time for policy makers in all countries to realize that the effect of trade on employment is fungible. That is, any import or export restriction at best protects low-paying jobs at the import-competing end of a nation's industrial spectrum at the expense of high-paying jobs at the export end.

Closing Remarks

In closing, may I say that in the eyes of Korea, the United States is still the champion of free trade in the world. Hence it is our sincere hope that, on matters of protectionism as well as other economic policies, the United States will assume leadership commensurate with its powers and responsibilities in world economic affairs, and will promote welfare not only for its citizens but also for those of its allies. Given such a leadership, the potential for benefits from close cooperation in the Pacific Basin and elsewhere will be immense.