Rising Protectionism and the U.S. - Korea Economic Partnership

 

Paper presented at Western Governor's Conference, Honolulu, Hawaii, August 27, 1985.

 

               Addressing a Seattle audience in 1951, the late General Douglas MacArthur spoke of East Asia as America's next commercial frontier. In that same speech, he went on to predict "the gradual rotation of the epicenter of world trade back to the Far East whence it began centuries ago." At the time, few observers would have agreed with him. Japan had not yet recovered from the Second World War, and Korea lay in ruins as a result of the communist invasion of the year before.

In the subsequent three decades, however, MacAuthur's prescience has been amply demonstrated. Today, East Asia is in the forefront of world economic progress. And Korea, I am pleased to say, is playing an increasingly vital role in the East Asian economic region. This is, I believe, a development with important implications for the United States, concerning which I would like to share my thoughts with you during the next several minutes.

 
Trade Relations
 

The logical starting point of our discussion is trade, the linchpin of U.S.-Korean economic partnership.

Over the past quarter century, bilateral trade between the United States and Korea has surged ahead at an impressive 23 percent average annual rate to reach $17 billion in 1984. For the decade 1974-1984, U.S. exports to Korea grew 14.5 percent a year on average, compared with 7.8 percent a year for all U.S. exports. During the same period, America's imports from Korea increased 21.5 percent on average, compared with 12.4 percent for total U.S. imports.

The cumulative current account balance for 1974-1984 was in favor of the United States, while the trade balance was generally in a state of equilibrium despite some fluctuations from year to year. For 18 of the 24 years from 1961 through 1984, the United States exported more to Korea than it imported. This is in sharp contrast to the huge deficits the United States has endured for many years in its trade with Japan and Taiwan. Such remarkable and relatively balanced trade growth has been the result of constant efforts on the part of our respective governments and business communities to strengthen economic relations on the basis of our two countries' high degree of economic complementarity.

The United states continues to be Korea's largest trading partner, while Korea, having ranked fifteenth a decade ago, has now emerged as the seventh-largest trading partner of the United States. Korea is also the second-largest market for U.S. exports in the developing world, and, in particular, the fourth-largest buyer of U.S. agricultural and coal exports.

Our bilateral trade relationship has become increasingly important to both Koreans and Americans. As President Reagan stated in a November 1983 address in Seoul, "Trade between our two countries has provided innumerable jobs in both our nations, and we must redouble our efforts to expand that trade."

If we work together, I am fully confident that we can do as well in the future as we did in the past, if not better. There are several valid reasons, in my opinion, for such optimism.

First, the Korean economy is already one of the world's most dynamic and is expected to remain so into the foreseeable future. Last year, for example, Korea's GNP grew, in real terms, by a very healthy 7.6 percent, while inflation was held to less than 3 percent. This combination of high growth and low inflation is proof, I think, that the stabilization policies of the last few years are bearing fruit. Also encouraging is the continued decline in the current account deficit, with a surplus likely by next year.

Of course, there are a few dark clouds on the world economic horizon that are casting shadows over Korea's 1985 growth prospects. I refer in particular to rising protectionism and economic downturns in the major industrial nations coupled with unbalanced foreign exchange rates. All three factors impact adversely on Korean export sales, which declined 4 percent in the first half of this year compared with the same period of 1984. As a result, our economic planners were obliged to lower their real GNP growth projections for 1985 to 5-6 percent from the original estimate of 7-8 percent.

Taking a longer-term perspective, I expect Korea to maintain its growth momentum on the basis of an expanding domestic market along with continued technological improvement. An average annual real GNP growth rate of about 7 percent is likely. If the United States can maintain its 22 percent share of the Korean import market, U.S. exports to Korea are projected to more than double from $6 billion in 1984 to $13.5 billion in 1990.

Second, as a rapidly developing nation with few indigenous raw materials, Korea is a natural market for America's most successful export items: advanced technology, minerals such as coal and iron ore, and agricultural products such as wheat and cotton. In return, Korea offers the American consumer a wide range of high-quality, reasonably priced light industrial products as well as low value-added heavy industrial goods. This complementary relationship is the bedrock on which our two countries can further strengthen trade and economic cooperation.

Third, Korea has been vigorously pursuing import liberalization, about which I will tell you more in a few minutes.

 
Direct Investments
 

Turning to the area of direct investment, I am pleased to say that Korea's recently improved foreign investment climate is one of the most favorable of any developing country. Last year, our National Assembly enacted sweeping revisions of the nation's foreign investment code designed to slash red tape to the bare minimum, liberalize entry requirements, and provide added incentives for overseas investors.

Already this massive reform is beginning to bear fruit. For example, IBM has decided to invest $13 million in establishing a 100 percent IBM-owned subsidiary in Korea to market the firm's state-of-the-art office equipment.

Overall, approvals of new U.S. investment projects in Korea have increased 100 percent since July 1, 1984, when the revised law went into effect.

In total, American businessmen have invested some $662 million in Korea since 1962, making significant contributions to the growth of several of our key industrial sectors. During the same period, U.S. and Korean firms have signed over 700 technology licensing agreements. In quality terms, the United States has always been our foremost supplier of technology. And U.S. foreign direct investment and technology transfers have usually been accompanied by U.S. exports of goods or services. Hence, the current "boom" in U.S. joint-venture and technology collaboration with Korean firms is almost certain to stimulate increased U.S. exports to Korea.

I believe some of the most interesting prospects for expanded U.S.-Korean economic collaboration lie in the field of industrial coproduction, particularly for parts and components. More and more U.S. firms are seeking to utilize Korea's well-educated, cost-efficient labor to manufacture many of the less sophisticated industrial items that such companies find increasingly uneconomical to produce at home. The United States can also utilize Korea's industrial structure and geographical location in accessing nearby Asian markets, such as China and Japan. In recent years these opportunities have increased due in part to the relatively open-door policy that China has adopted.

However, U.S.-Korean investment is no longer a one-way street. Increasingly, Korean companies are showing interest in investing in the United States. And U.S. businessmen and state governments are becoming more active in encouraging such investment. For example, this coming fall we look forward to welcoming no less than 15 investment and trade missions dispatched by individual U.S. states, mostly led by their respective governors. In addition, three states-Alaska, Georgia, and Alabama-have set up representative offices in Seoul for trade and investment promotion.

The trend really began in earnest when Korea's Gold Star company opened a color TV and microwave oven factory in Alabama in 1982, followed in 1984 by a similar facility in New Jersey operated by Samsung Electronics.

As of June 1985, there were 151 subsidiaries and affiliates of Korean companies incorporated in the United States and engaged in a wide variety of manufacturing, mining, and trading activities. The success of these pioneer Korean ventures clearly points to the many other profitable opportunities awaiting Korean investors in the United States.

 
Is Korea a Second Japan?
 

Of course, the closer a relationship, the more likelihood there is of frictions arising from time to time. And the U.S.-Korean economic partnership is no exception.

Of these relatively minor irritants, trade frictions account for the lion's share. In the view of some of my countrymen, U.S. curbs on imports from Korea are seen as an affront to a country that has been a loyal ally of the United States for almost 40 years. Conversely, I know there are some Americans who regard Korea as a "Second Japan" posing a mortal threat to U.S. industry and jobs.

These opposing views represent extreme positions and, fortunately, are held only by minorities of Americans and Koreans. But I am worried that such dangerous ideas may be gaining ground. Therefore, I think it's essential that opinion makers in both our countries vigorously combat these misperceptions lest they undermine a partnership that has proven so mutually beneficial.

Obviously, some U.S. trade restrictions are justified by the need to temporarily shelter industries until they can get back on their feet. Most Koreans recognize that this is not an all-or-nothing situation, but rather a matter of degree. Take the steel industry, for instance; although the U.S. government has officially declared Korea to be a "fair trader" in steel, we nevertheless agreed to voluntarily restrain our steel exports to the United States. We no more wish to disrupt the domestic market of our most important trading partner than Americans want to punish us for our recent economic success. Those in both countries who suppose the contrary have little understanding of either Americans an Koreans.

Just as we desire other nations to grant us fair access to their markets, so also are we willing to grant them fair access to ours. Currently some 85 percent of the various kinds of goods traded internationally are free to enter Korea without special authorization, compared with only about 54 percent before we began lifting import restrictions in 1978. By about 1988, this so-called import liberalization ratio will be roughly the same in Korea as in the advanced industrial nations of North America and Europe-over 95 percent. Equally significant, tariff rates are being lowered along with import barriers. I think it's fair to say that Korea is moving steadily in the direction of free trade at a time when most of our trading partners are heading the opposite way. Of course, we won't arrive at our destination overnight. But as the Korean saying goes, "Begun is half done," and we have, I believe, made an impressive beginning.

As for the notion of Korea being a "second Japan," a brief look at the facts should serve to invalidate this comparison. The fundamental difference between the Japanese and Korean development strategies is that Japan has striven for industrial self-sufficiency, while Korea has not. As a result, Japanese companies are able to efficiently produce virtually everything Japanese consumers wish to buy. By way of illustration, in 1983 only 23 percent of Japan's imports were manufactured goods-a figure strikingly lower than that for any other major industrialized nation. In sharp contrast, about 50 percent of all Korean imports are manufactured good. Whatever one may think of Japan's industrial strategy, it is, for a variety of reasons, feasible in the case of Japan but completely unrealistic in the case of Korea.

That distinction explains in large part why Korea's annual trade account is almost always in the red, whereas Japan's is always in the black-at least since 1964. The same distinction also holds true with regard to financing of industrial development. Japan has paid for its industrial expansion primarily by means of domestic savings. Korea, by contrast, has been forced to turn to world financial markets, accumulating in the process a foreign debt of more than $43 billion. Also, one should recognize that in terms of sheer volume Japan's economy is 15 times larger than Korea's, but Korea's defense burden is six times greater than Japan's in terms of its proportion of GNP.

Refuting the notion of Korea as a "second Japan," economic journalist Kenneth Minard wrote in recent issue of Forbes Magazine: "U.S. businessmen and policymakers who think that do so at Korea's and our own"-meaning America's-"peril."

 
Concluding Remark
 

As I have indicated, there are areas of both convergence and divergence in the overall configuration of U.S.-Korean economic ties. However, I hope I have demonstrated to your satisfaction that the former are far more numerous and important than the latter. The closer a relationship the more likely the partners are to differ from time to time. Conversely, strangers seldom differ because their relationship is basically one of indifference. I strongly believe that true partnership does not consist in seeing eye-to-eye, but rather in looking outward in the same direction. For almost 40 years, Americans and Koreans have indeed looked outward in the same direction. And with our vision clearly focused on the limitless horizon of freedom and economic opportunity, our partnership will, I am confident, continue to endure and grow stronger in good times and in bad.