What Could Korea Mean to the U.S.
in the Age of Asia-Pacific?


Paper entitled "The Partners in Progress: The Evolving Korea - U.S. Relationship", presented at the Asia Society, Washington, D.C., January 14, 1984.


               Speaking of American-Korean relations, I cannot help thinking what an eventful year 1983 was for my country and how once again our two nations have been drawn closer together as a result.

The entire free world still remembers with sorrow the downing of Korean Air Lines Flight 007 by the Soviets on last September 1 and, just six weeks later, the North Korean bomb attack in Rangoon that cost the lives of 17 South Koreans, including several top government officials.

My countrymen will never forget the outpouring of sympathy we received from the American people on these two tragic occasions. It reminded us in a dramatic way of what we already knew so well: that the United States in standing by our side as a loyal friend in both word and deed. Moreover, President Reagan's visit to Seoul was a powerful morale booster at a time when we needed it most.

Korea: The Epicenter of Developments

The summit talks between the presidents of our two countries served to underscore the vital U.S. interest in an economically robust and militarily strong South Korea and, by the same token, the vital interest Korea has in the continued economic and military strength of the United States as leader of the free world.
The summit talks certainly echoed, I believe, the widely held view that Korea has become a focal point in Northeast Asia from both a strategic and an economic perspective. I would like to cite for you, in this regard, the cogent words of the U.S. ambassador to Korea, Dr. Richard L. Walker:

The Pacific Basin and particularly the Northwest Pacific has become the dynamic center of gravity of key world activities both economic and strategic. . . . Korea sits at the epicenter of developments here. The peninsula is at the center where the three great nuclear powers meet . . . the three greatest economies meet, and four of the seven most populous nations in the world meet. . . . With increasing frequency, the area in which Korea is a crucial center will determine events on a global scale.

Viewed in this light, it becomes all the more clear that U.S.-Korean defense cooperation is the indispensable foundation for preserving peace not only on the Korean peninsula but also in the Asia-Pacific region as a whole. Actually, we are the only major American ally that has consistently matched the United States in the proportion of GNP spent on defense-about 6 percent. The figure for Japan is less than 1 percent, and it averages around 3 or 4 percent for America's NATO allies in Europe.

On the economic front, it is becoming increasingly evident that the development of the Asia-Pacific region is of critical importance to the United States and no less so to Korea. In 1982, for example, America's transpacific trade volume exceeded-for the first time-her transatlantic trade, and U.S. exports to other Pacific Basin countries reached some $52 billion, or about a quarter of total U.S. exports. As for Korea, more than 70 percent of her trade is conducted with other Asia-Pacific countries, the U.S. being, of course, the most important market for both exports and imports.

In fact, bilateral trade between our two countries in the year just ended reached $13.5 billion, again ranking Korea the ninth-largest U.S. trading partner. The most striking fact about our trade relationship is the complementary, rather than competitive, pattern of Korean and American industry that it reflects. This is certainly in sharp contrast to Korean-Japanese and U.S.-Japanese trading patterns.

What Korea needs most from overseas, America is best at producing-especially agricultural products, capital goods, advanced technology, and sophisticated service exports. The growing market for these goods and services in Korea is complemented by the expanding American market for Korea's labor- and semi-skill-intensive manufactured goods. This structural complementarity accounts in large part for the remarkably rapid, yet relatively balanced, growth of U.S.-Korean trade.

While trade is the very core of our mutual economic partnership, investment, finance, and technology also play crucial roles, particularly for Korea. Since 1962, American businessmen have invested some $470 million in Korea, making significant contributions to the development of certain key sectors of our economy.

In the closely related area of technology transfers, U.S. sources are second to Japanese in terms of quantity but clearly first in terms of quality. As for commercial loans, American banks are our principal lenders, with some $3.4 billion in long-term loans outstanding. I trust that the distinguished bankers present here today would agree with me that Korea still enjoys a good credit rating in banking circles despite the international debt crisis in recent years.

Some Positive Factors for American Businessmen

What, then, are the major factors that persuade American traders, investors, and bankers to place such substantial bets on Korea's continued economic success? Let me quickly enumerate a few of the more obvious.

First, South Korea-with a population exceeding 40 million-offers a large domestic market of increasingly prosperous consumers. In terms of population, Korea is more than twice the size of Taiwan, seven times larger than Hong Kong, and 16 times larger than Singapore. In fact, it is far and away the largest newly industrializing country in Asia.

Second, our large population includes a large pool of well-educated and highly skilled labor. During the record growth years of the late 1970s, Korea's real wage rate rose too rapidly, adversely affecting domestic price stability and our competitive position in world export markets. However, that is no longer the case. With the sharp decline in the rate of inflation in Korea to less than 3 percent and the cooling off of the Middle East construction boom, real wage rates in Korea have fortunately now returned to normal cost-competitive levels.

Third, Korea is in close proximity to the leading markets and supply sources of Northeast Asia. As this region grows in importance as a center of world trade, Korea will also assume greater importance as an operational base for foreign companies for the region as a whole.

Fourth, Korea maintains a favorable infrastructure and institutional framework for the foreign business community. The physical side includes fully furnished industrial zones, backed up by integrated and efficient transport and communication networks.

And, last, South Korea is a stable, market-oriented country closely allied to the United States. Unlike the situation in so many other developing countries, in Korea there is no ideological hostility to the concept of foreign investment at either the governmental or private-sector level.

Changing Policies to Meet External Challenges

On the institutional side, our National Assembly has just finished overhauling Korea's Foreign Capital Inducement Law, first enacted back in 1966. Frankly, this latest revision was long overdue considering the tremendous economic changes that have recently taken place. Although the new legislation affects both foreign loans and foreign investment, I will limit myself to a few brief comments about the latter set of changes. In sum, they constitute, in my opinion, a major advance in opening up the Korean economy to greater participation by foreign investors. The cornerstone of these new provisions is the new "Negative List" system in place of the old "Positive List" system. In practice this will mean that foreign investment not included in the Negative List will be approved automatically if it meets certain simple requirements, thus slashing red tape to the bare minimum.

Restrictions on disinvestment are also being drastically eased, along with regulations on reinvestment of retained earnings. As for technology transfers, the prior-approval requirement currently in force for licensing agreements will be replaced by a simple reporting procedure in most cases.

The upshot of these changes should be the creation of a much more salubrious foreign investment climate in Korea. The Finance Ministry is now preparing enforcement regulations so that the new legislation can take effect beginning July this year.

Perhaps the ultimate incentive for overseas investors and the ultimate concern for foreign bankers is the overall performance and health of the Korean economy itself. I am pleased to note that our economy is once again on the right track and moving ahead at a brisk pace. In 1983, we recorded our best GNP growth performance since 1978-about 9 percent. At the same time, the current account deficit fell to $1.8 billion, and we held our debt-servicing ratio to a manageable 20 percent or so, when payments on short-term debts are included. I already mentioned the sharp decline in the rate of inflation, which is expected to remain in the 2 to 3 percent range at least for the next few years unless disturbed by any new external shock. Most encouraging of all is the fact that the export engine is back to operating at full speed, with exports in 1983 growing by more than 11 percent, compared with only about 3 percent in 1982.

Encouraged by these favorable developments, Korea's Economic Planning Ministry recently announced a revised version of the current Five-Year Plan. The revised plan projects an annual 7 or 8 percent growth rate through 1986 on the basis of continued price stability, technological enhancement, and a more dynamic role for small and medium-sized businesses. It also calls for reduced foreign borrowing and, above all, more efficient allocation of available resources through greater reliance on the market mechanism.

The only real dark cloud on our economic horizon is the continuing menace of protectionism in the advanced nations of Europe and North America. At present about half of our exports are subject to various forms of restriction on the part of the importing countries. Despite the world recovery presently underway, the protectionist tide shows no sign of receding. This is of special concern to us because the Korean economy lives by trade. Obviously the less we export, the less we are able to import and the more difficult it becomes for us to service our external debts.

I imagine that some of you are now thinking that the same could be said for certain other countries, so why does Korea deserve special consideration? In reality, the case of Korea is very different. Please remember that Korea is and always has been a trade-deficit country, accumulating a large amount of external debts. We are also still a developing country with a long way to go before we can play in the same ballpark as Japan, the United States, and Western Europe. Even after 20 years of spectacular growth, our per capita income is only about one seventh that of the industrial giants. And, as I mentioned earlier, we have to spend a high proportion of our much smaller GNP on defense.

In today's highly interdependent world of developed and developing nations, international trade is a bit like a game of golf. In order to play the game fairly, it's necessary to give some handicap to the less experienced players for the long-run benefit of all players and of the game itself.

But perhaps the analogy is not entirely accurate. After all, free trade is usually not a "favor" that a consuming country grants a producing country. Every country is obviously both producer and consumer. In the early nineteenth century, the French economist Frederic Bastiat pointed out that "protectionism is the sacrifice of the consumer to the producer-of the end to the means." Insofar as trade is a means of increasing the well-being of the people in the nations involved, to protect uncompetitive and declining industries-no matter how much political clout those industries may wield-is to mortgage the well-being of future generations to the short-term convenience of special interests. There is, to sum up, all the difference in the world between protection designed to temporarily shelter "infant" industries and protection designed to prop up indefinitely obsolescent manufacturing sectors. The first looks to the future; the second is riveted to the past.

I won't try to tell you that Korea is about to transform itself into a free trade zone overnight. Indeed, I must admit that import restrictions abound in Korea-some of them justified and some unjustified according to a reasonable interpretation of free trade principles. The Korean government is, however, firmly committed to liberalizing our domestic market as rapidly as circumstances allow. This should not only help improve the efficiency and competitiveness of domestic manufacturers but also enable us to play a more active role in support of a free and open global trading system.

At present, more than 80 percent of the various kinds of goods traded internationally can enter Korea without specific authorization, compared with only 54 percent in 1978. These liberalization measures will be continued and by the middle of this decade, we expect that our domestic market will be as open as those of the industrialized countries in terms of the liberalization ratio. And I should emphasize that we have persevered along this path despite our chronic balance of payments deficits and the protectionist response of many of our principal trading partners.

I am hopeful that the United States, as the world's foremost trading nation and leader of the free world, will set an example in renouncing protectionism for other nations to follow. President Reagan has long advocated free trade, and I look forward to substantial progress in that direction.

Concluding Remarks

In any case, the Korean-American economic relationship will continue to be an intimate one at the same time that it becomes more mature and better balanced. Occasionally, problems and misunderstandings are bound to arise, as they do in every mature relationship. With determination and goodwill on both sides, they can, I am confident, be fully resolved. Throughout history, few pairs of nations have become as close partners as have the United States and the Republic of Korea. It is a partnership in progress, a partnership in security, and a partnership in hope. And it is constantly evolving. As partners, America and Korea are like the man in Robert Frost's famous poem, for we have promises to keep, and miles to go before we sleep.