Korea's Efforts to Balance Trade with the United States

 

The original title of the paper was "Korea's Import Diversification Program: Efforts to Balance Trade with the United States," presented at the National Association of Manufacturers, Washington, D.C., March 9, 1987.

 

               I am very pleased indeed to address this gathering of one of the oldest and most distinguished business organizations in the world, and I would like to thank Chairman Trowbridge for his kind invitation to such a renowned setting. Of course, it's only coincidental that your association's acronym is spelled the same way I spell my family name in English. But I cannot help feeling a certain affection for an organization that bears such a familiar-and, may I say-pleasant-sounding name.

Today I would like to focus on the trade issues between our two nations and measures Korea is taking to improve our trade relations. Specifically, I plan to share the results of a study to facilitate import diversification-the shifting of Korean imports from Japan to the United States. The study was undertaken by my own organization, the Korean Traders Association (KTA), a private group that represents all Korean trading companies.

Before I elaborate on the study itself, I would like to briefly comment on some of the more striking features of our trade relationship. Korea's trade with the United States has been marked by dramatic growth in recent years. In fact, trade between our two countries reached $17 billion last year, a more than 70-fold increase over the last 20 years. Furthermore, while the United States has been Korea's leading trade partner during most of this time, Korea ranks as America's seventh-largest trade partner, ahead of such countries as France and Italy.

Increased trade ties have paved the way for increased investment flows. At last count, U.S. investment in Korea had exceeded $700 million, and Korean investment in the United States-in areas from autos to steel and states from New Jersey to Alaska-had reached nearly $200 million.

This atmosphere of increased trade ties has inevitably brought new issues to the forefront of our relationship. One such issue is the recent focus in the United States on bilateral trade balances. Viewed in a longer-term perspective, I would underscore the fact that the United States has exported more to Korea than it has imported from Korea in 18 of the past 26 years. In fact, in 1986 Korea experienced her first current account surplus ever, and even then the $7 billion surplus with the United States amounted to only 4.2 percent of the total U.S. trade deficit, significantly smaller than the 34.5 percent for Japan, 13.7 percent for Canada, or 9.2 percent for Taiwan.

However, Korea takes seriously the magnitude of U.S. concerns over the growing deficit with Korea. In fact, Korea has similar problems with Japan, for like the United States, we too suffer from chronic and ever-growing trade deficits with Japan. In our case, this concern has led to all-out efforts on the part of both the Korean business and government sectors. For example, the trade deficit with Japan and surplus with the United States has prompted the Korean Traders Association (KTA) to undertake a study of its causes and propose remedies to this situation. The result was the import diversification program, whereby Korea is pursuing a plan to switch import sources from Japan to the United States and simultaneously achieve twin goals: reducing the deficit with Japan and the surplus with the United States.

A number of factors have accounted for Korea's trade patterns with the United States and Japan. First, Japan's proximity to Korea has proven an advantage in increasing Japanese sales. Second, Japan's cultural background has contributed to its familiarity with Korea, from market structure to consumer tastes and trends. Aside from Japan's geographic advantage, in all other areas that affect Korean purchasing decisions-from product quality to servicing-the United States can play a strong role in the Korean market.

The Korean government and private sector have taken a number of steps to accord increased access to our market and special access for products from the United States. For instance, last year 63 items were liberalized specifically at the request of the United States, and the restrictions for items such as personal computers were lifted solely in the case of the United States. Furthermore, the import liberalization ratio, or measure of goods that can enter Korea without prior government authorization, stands at 93.5 percent, a level comparable to most developed nations.

Nevertheless, these steps have not translated automatically into benefits for the United States. More often than not, Japan has reaped the benefits of market access for which America has pushed. In a recent Congressional hearing, Representative Al Swift noted, "While the U.S. has penetrated 17 percent of the new markets [in Korea], Japan has penetrated over 70 percent." What this suggests is that by themselves, market opening measures will not guarantee increased American sales. To be fully successful, Korea's liberalization measures will require concerted efforts on both sides of the Pacific.

With this end in view, KTA recently conducted a survey of local businessmen's attitudes toward substituting American imports for Japanese imports. We set out with two goals in mind. The first was to understand the factors behind trade patterns with our U.S. and Japanese trade partners. The second was to propose actions to reduce imbalances. I understand that you will receive the summary report of this survey, so I needn't discuss the findings in detail. However, allow me to highlight a few results that are particularly relevant.

The survey was conducted during the past two months and involved personal interviews with 199 Korean companies concerning their criteria in purchasing 285 products. The products that were the focus of the study fell into three categories. The largest group of 169 products, including tractor parts and electronic copy machines, was selected because we considered the U.S. products to be competitive. The criteria used for selecting the second group of 54 products, from loudspeakers to glass tableware, was that the U.S. government had indicated an interest in selling the products in Korea. The third and final group of 62 products was chosen on the basis that there already was a high proportion imported from Japan.

The response ratio of the survey was 70 percent, and is only one indication of the seriousness with which Korean companies regard the matter of import diversification. More telling than the absolute number of responses received is what those responses revealed.

One of the questions posed to the nearly 200 firms surveyed was the criteria used in their import decisions. The responses indicated that the rationale for business decisions in Korea is not unlike that in America. For example, when asked to select the factors that are most influential in their purchasing decision, the respondents first named Quality (45 percent), second, Price (39 percent), third, ability to meet Delivery Schedule (11 percent), fourth, Servicing (3 percent), fifth, Accommodating Small Orders (1 percent) and lastly, Language.

When respondents were asked to compare the United States and Japan on nonprice factors such as servicing and delivery schedules, Japan was identified as having the competitive edge in four out of five categories. The only exception was in quality, where the majority, 48 percent, deemed the two comparable, while 36 percent believed Japan had the edge and 16 percent gave the edge to the United States. In other nonprice categories, Japan received marks far better than those given to the United States. An average 85 percent of the respondents gave superior marks to Japan in meeting delivery schedules, providing servicing, knowing the Korean market, and accommodating small-sized orders. This suggests that U.S. improvements in these areas can go a long way toward improving their position in Korea.

Another question that may provide useful information concerns factors that Korean companies considered an impediment to purchasing U.S. products. In 28 percent of the cases, price was the leading factor. The second factor was delivery problems (26 percent), third was lack of product information (13 percent), and fourth was inadequate servicing (11 percent).

Clearly, price plays a major role in decision making. For that reason, it may be useful to explore briefly U.S. and Japanese pricing in different sectors. Of all products surveyed, U.S. prices averaged 22 percent more than Japanese prices. U.S. machinery and steel averaged 23 percent higher than comparable Japanese products, U.S. electronics about 20 percent higher than Japanese goods, chemicals were 14 percent more expensive, and textiles were 16 percent higher.

Related to the price issue is the impact of exchange rates on purchasing decisions. When asked to speculate on the effect yen appreciation would have on diversification, responses were instructive. They indicated that at the level at the time of the survey (160 yen = $1), around 20 percent of the products could be candidates for diversification; at a level of 120 yen = $1, 42 percent of the products could be diversified, while for 38 percent of the products, appreciation was not considered relevant for diversification.

I would stress that this survey was not merely an academic exercise. Its primary purpose was practical, to pave the way for achieving improvements in our trade balances. In moving from the study to its implementation, I would like to highlight areas where the program has already yielded results.

In 1986, Korea's import diversification plan resulted in an additional $180 million in U.S. sales to Korea. By sector, chemicals accounted for $97 million of added sales, machinery $34 million, electronics $26 million, and textiles $21 million.

As our current buying mission concludes its tour of 32 cities in 13 U.S. states, our total purchases of U.S goods have reached nearly $2 billion. In particular, we are very much encouraged that about $400 million of these purchases are attributable mainly to the shift of import sources from Japan to the United States.

Further efforts to increase import diversification are anticipated throughout 1987 and beyond. Toward this end, KTA published a list of over 200 potential diversification products. It is my hope that this information will prove useful to American companies' efforts to improve their sales in Korea.

Thus far, I have concentrated primarily on how U.S. companies can better prepare to enter the Korean market. However, resolving problems U.S. companies face in the Korean market is not only a matter of improving product quality or servicing. Admittedly, part of the problem is on the Korean side, where even with strong efforts by U.S. companies, there have been legitimate difficulties in entering the Korean market.

In view of this, Korea will continue with its efforts to open markets and reduce barriers. With equally concerted efforts on both sides, I believe our two countries can continue to expand upon this mutually beneficial partnership.

In conclusion, the import diversification effort exemplifies Korea's commitment to improving trade relations with the United States. The survey results, in tandem with Korea's market-opening measures, can serve as guideposts for the American businessperson in the Korean market. Government-to-government initiatives have paved the way for significant advances. Together, the U.S. and Korean private sectors can capitalize on these advances. This combination of American creativity and determination with concerted Korean efforts should yield a fruitful collaborative partnership.

The fundamental ties between our countries are strong and secure. I am confident that through joint efforts, we can successfully face any challenge on the basis of our long-standing history of alliance, friendship, and cooperation.