Korea's Trade Surplus and Request for Revaluation

 

Paper presented at East-West Executive Committee Meeting, San Diego, California, March 18, 1988.

 

               I was asked to speak about the status and prospects of U.S.-Korean relations. But if you'll permit me, I would prefer to limit my remarks to the economic side of this very broad topic. As chairman of the Korea Foreign Trade Association, I am closely involved on a daily basis with U.S.-Korean economic relations-especially trade relations. Moreover, it is only in the area of trade that serious frictions have developed between the United States and Korea. In all other areas, notably mutual defense, diplomacy, and overall political relations, the United States and Korea are in close accord.

I certainly don't wish to minimize U.S.-Korean trade frictions, but at the same time we should take care not to exaggerate them. And I'm afraid that in this sensitive area, exaggeration is the child of political expediency. Last autumn, during our own presidential election campaign, certain persons chose to make an issue of alleged U.S. interference in Korea's economic decision making. By the same token, I understand that at least one U.S. presidential candidate has made quite a point of charging Korea with unfair trade practices. These are not merely exaggerations; they are very dangerous exaggerations. Politicizing trade disputes is part of the problem, not part of the solution. Since the United States and Korean economies are basically complementary, such disputes should be viewed as growing pains rather than chronic disorders. Seen from this perspective, such disputes can best be solved through a process of mutual accommodation-not confrontation.

Now let me turn to some of the specific issues confronting U.S.-Korean economic relations. The best known of these, surely, is Korea's trade surplus with the United States, which last year totaled nearly $9.6 billion. First, let me note that this is a relatively recent phenomenon. Unlike Japan and Taiwan, for example, Korea's trade with the United States was generally in the red until 1982. The rather sudden emergence of Korean trade surpluses with the United States was clearly the result of the strong dollar, not Korean protectionism. On the contrary, the Korean market was far less open before 1980 than it is today, and yet during that earlier period the United States consistently sold more to Korea than we did to the United States.

In fact, Mr. Gephardt is out of date when he says that the U.S. trade deficit with Korea is "growing." Since the middle of last year, U.S. exports to Korea have been growing at a faster rate than Korean exports to the United States. The most recent figures, for January 1988, show that U.S. exports to Korea increased 53.7 percent over January 1987, while Korean exports to America rose only 18.2 percent in the same month. As a result, our trade surplus with the United States declined slightly in January, and we expect this trend to gather momentum in the coming months.

What accounts for this very significant turnaround? On the one hand, the weak dollar seems to have finally arrived at the end of the J-curve. But just as important are Korea's efforts to buy more from the United States. Over the last two years or so, the Korean government has repeatedly liberalized whole categories of imports ahead of schedule to accommodate the United States. Just recently, the government announced that as of April l the Korean market will be completely open to manufactured imports.

At the same time, tariff rates have been dropping, and long- standing import barriers are being dismantled. Of these, the best example is our import surveillance system, which is set to be abolished this year. If any of you should have the opportunity to visit a large Korean supermarket, you would see a surprisingly wide variety of U.S. products on sale at competitive prices. That would not have been true as recently as a year ago.

Obviously, Korea is not yet a free trade zone. We still have a long way to go, particularly in the agricultural and service sectors. Let me take each of those in turn. Farm families make up roughly 20 percent of the Korean population. Were it not for their votes last December, it is quite possible that a very different and much less pro-United States government would have taken power last month. Wholesale liberalization of Korea's agricultural market would devastate the rural sector and could lead to deep social unrest. Also, please bear in mind that Korea is already the fifth-largest market for U.S. agricultural exports, of which we bought $1.3 billion worth last year, 43 percent of our total farm imports. Yet even in the farm sector, our government is committed to an eventual open-door policy. However, social and political circumstances dictate that the pace of liberalization must be slower than in the manufacturing sector.

In the services sector, liberalization has been proceeding more rapidly, despite the relatively weak competitive position of Korean companies in this area. Last year, for the first time, American insurance firms were licensed to do business in Korea, and this year we are partially opening our advertising market to U.S. companies. As Korean service firms become stronger, liberalization will be stepped up.

A second and closely related issue of concern is the exchange rate between the Korean won and the U.S. dollar. Some Americans believe that faster appreciation of the won against the dollar is the best approach to reducing America's trade deficit with Korea.

Certainly won appreciation can help to some extent, but it's no panacea. In addition, too rapid a rate of appreciation would severely handicap the Korean economy.

Already the won has appreciated nearly 16 percent against the dollar since reaching its low point in October 1985. And the rate of appreciation is accelerating. Just since the first of the year, the won has gained nearly 5 percent against the dollar, while most other currencies have been moving in the opposite direction.

Because the won is not a convertible currency traded, bought, and sold internationally, it is difficult if not impossible to say what the "true market value" of the Korean currency should be. Comparisons with the rate of currency appreciation in Japan and Taiwan are inaccurate and misleading for several reasons. First, both those countries have amassed huge foreign exchange reserves through running trade surpluses over the course of decades. Taiwan, for example, currently holds $68 billion in foreign currency, compared with only $9 billion for Korea. Second, unlike Japan and Taiwan, Korea owes $30 billion to overseas creditors, making us the fourth-largest debtor nation among developing countries. And, of course, this must be repaid in hard currency. Third,wage rates are rising much more rapidly in Korea than in our principal trade competitors in the wake of last year's political reforms. Fourth, both the United States and Europe have decided to "graduate" Korea from their GSP. To be sure, Taiwan has also been graduated, but Taiwan's small businesses are generally better prepared to cope with the effects of graduation than are their Korean counterparts. And sixth,the strong yen has greatly increased the cost of the parts and components that we import from Japan for use in many of our exports. When large Japanese firms needed to cut their export production costs to compensate for the rising yen, they were able to do so to a great extent by squeezing their local suppliers. This is an option we can't exercise to the same degree because our export industries depend so heavily on Japanese imports.

Let me conclude this point by quoting Socrates, who said that "injustice results as much from treating unequals equally as from treating equals unequally." On the exchange rate issue, it would certainly be unjust to treat the won, the yen, and the Taiwan dollar on equal terms.

In any case, the won is appreciating, the U.S. trade deficit with Korea is beginning to come down, and Americans and Koreans are investing more than ever before in each other's country. New U.S. investments in Korea totaled $ 255 million for 93 cases last year, but perhaps more interesting is the fact that Korean investment in the United States reached $ 168 million for 37 cases in 1987, a 190 percent increase over 1986. This is still a modest figure, but it shows the growing contribution Korean firms are making to production and job creation in the United States. It should also be noted that Korean investment in America usually takes the form of productive assets-plants and equipment-unlike the shares and T-bills preferred by some other foreign investors.

Taking a somewhat longer perspective, it's increasingly clear that Korea's trading patterns are undergoing fundamental changes. Slowly but surely we are reducing our import dependence on Japan and our export dependence on the United States. But even though we expect to sell a relatively smaller share of our exports in the U.S. market-and more to Japan and Europe-that does not mean that our economic links with America will weaken. Instead, they will tend to assume new and more complex forms such as industrial coproduction, cross-investment, technological collaboration, and joint ventures in third countries. Of course, trade will continue to be the linchpin.

It would be a pity if we allowed short-term political considerations to cloud this very promising long-term perspective. Whatever certain politicians may say from time to time, the fact remains that in macroeconomic terms the American and Korean economies basically complement, rather than compete with, each other. I think there's a growing recognition of this fact on both sides of the Pacific. And so I am confident that the U.S.-Korean economic partnership rests on a firm foundation-a foundation well able to withstand the temporary gusts of political controversy.