Democratization and Market - Opening Efforts in Korea

 

Paper originally entitled, "The Current Trade Issues between the U.S. and Korea," presented at the U.S. Chamber of Commerce, Washington, D.C., April 10, 1989.

 

              This afternoon I would like to present an overview of U.S.-Korean economic relations, emphasizing-perhaps unavoidably-the areas where frictions, misunderstandings, and disagreements have arisen in recent years between our two countries. However, such an emphasis should not obscure the fact that, for the most part, our bilateral trade relations are making a more important contribution to the well-being of both countries than at any time in the past. The tensions that do exist should be considered as growing pains that have to be endured and overcome as part of the maturation process.

 
Growing Pains for Democracy
 

Korea's fledgling democracy is also suffering from some fairly acute growing pains. And becuase the social turmoil we are now experiencing has major implications for U.S.-Korean bilateral relations, I want to comment on that before proceeding to the major theme of my remarks.

I know that the predominant image of Korea that reaches American homes is one of stone-throwing students, often shouting anti-American slogans. To be sure, this is an authentic image-but a rather incomplete one. I can assure you that the overwhelming majority of Koreans remain staunchly pro-American. A far greater threat is posed by the upsurge of labor unrest in the wake of wide-ranging democratic reforms that started in 1987. That year saw a 1,400 percent increase over 1986 in strike activity throughout Korea, most of it concentrated in the second half. Last year the number of strikes was "only" seven times greater than in 1986 and about half the level of 1987.

Not surprisingly, the impact on labor costs has been severe, with average wages in manufacturing rising 20.4 percent in 1988, nearly double the already steep growth rate of 11.6 percent in 1987. And this year we expect more of the same. Wage hikes were the major contributor to Korea's 7.2 percent inflation rate last year, the highest since 1981.

Moreover, in 1988, Korean manufacturers had to contend not only with spiraling labor costs, but also with rapid currency appreciation. On this point, I will have more to say in a moment. The Far Eastern Economic Review, published in Hong Kong, highlighted this worsening plight in its March 16 issue as follows: "Last year in South Korea, 401 companies closed because of won appreciation or labour wage rises, up a third from the previous year." As a result of these factors, the growth rate of Korean exports has declined precipitously, turning the nation's current account into a deficit this March for the first time in the last 19 months.

 
Korea's Market-Opening Efforts
 

By way of general summary, let me say that the U.S.-Korean trade gap continues to narrow, although some important bilateral issues have yet to be resolved. For last year as a whole, our figures show that Korea's trade surplus with the United States fell by nearly $900 million from the peak of $9.5 billion recorded in 1989. I say "our figures" advisedly because I know that U.S. statistics give a superficially different picture.

Indeed, they show no improvement at all in the bilateral trade balance. However, this statistical contradiction is more apparent than real. It all depends on whether certain categories of exports and imports, shipped around the end of last year, are credited to December 1988 or January 1989. But by either reckoning, they still reflect a significant decline in Korea's trade surplus with the United States.

More specifically, in 1988, Korea's imports from the United States increased by 46 percent, while our exports to your country grew by only 17 percent-roughly half the rate of the previous year. In the first two months of this year, the growth rate of Korea's exports to the United States turned negative compared with the same period in 1988, while imports from the United States increased by 30 percent, so that the trade gap continued to narrow. Now we can say that 1989 may well be the watershed year in our efforts to restore a balanced trade relationship between the United States and Korea.

By now, most of those efforts are probably familiar to you, so I needn't comment on them in detail. However, you may be interested in a brief summary of the measures we have taken or plan to take this year to further open our market.

First, since a major import liberalization program was initiated in 1984, the number of restricted import items has been reduced to 5.3 percent of the total (H.S. ten-digit classification) as of January 1989. Currently, Korea is preparing a three-year program starting in 1989 to liberalize the remaining items.

Second, the average tariff rate was reduced from 24 percent in 1983 to 18 percent in 1988, and it will further be reduced to around 8 percent-roughly the OECD level-by 1993.

Third, various laws and regulations dealing with import surges or health and safety standards are currently under scrutiny to reduce or eliminate nontariff barriers to imports.

Fourth, in the services sector, progress has also been noteworthy. Last January, for example, the government authorized five joint ventures between Korean and foreign insurance companies. Another highly sensitive service industry-advertising-will be opened to foreign participation virtually without restriction within two years. For those of you interested in the securities market, I suggest that you consult the detailed liberalization schedule announced by the Ministry of Finance last December.

There remain three principal areas where the United States and Korea have not yet reached full agreement: the won-dollar exchange rate, trade in agricultural products, and intellectual property rights.

The question of the exchange rate is difficult to discuss because it is a highly technical subject where experts can-and do-disagree. Korea's currency, the won, is not freely convertible overseas, and the nation has yet to develop a foreign exchange market. Hence we have no "market yardstick" with which to measure the "true" value of the won. Moreover, in determining its exchange rate, the Korean government must take into account a number of factors, not just Korea's trade balance with the United States. After all, the won-dollar exchange rate cannot be set independently of the currency's relation to the yen, the Deutschmark, the pound, and so on.

Another important consideration is that Korea's accumulated current account surpluses are far less and of much more recent origin than those of some other major U.S. trade partners, notably Japan and Taiwan. Also, both wage and inflation rates are rising much faster in Korea, as I mentioned earlier, than in the other East Asian NICs as well as Japan.

Last year, the won gained 16 percent in value against the dollar, and there is, I think, a growing belief among both Korean and American economists that the currency has just about reached its appropriate level.

As for agriculture, the sensitivity of this issue was recently underscored by a rather violent farmers' demonstration in our capital city of Seoul. I deeply regret the behavior of the protesting farmers, but we should recognize that people will often behave irrationally, even self-defeatingly, when they feel that their economic survival is at stake. I realize that American farmers must have felt the same way during much of the last decade. The practical difference is that farm families, making up about 3 percent of the U.S. population, are a marginal factor in American politics. In Korea, where they constitute almost 20 percent of the population, farmers can make or break a government if they are sufficiently mobilized and motivated.

Fortunately for both our countries, the incumbent Korean government is fully committed to opening the domestic market and pursuing balanced trade with the United States. However, not all political forces in Korea agree with this approach-indeed, far from it. I wonder, then-is it really in America's best interest to weaken that government and stir up anti-American sentiment for the sake of a few hundred million dollars a year in additional U.S. farm exports to Korea-especially, I might add, when Korea is already the second-largest foreign market for the American farmer?

Nevertheless, at considerable political cost, in July 1988 the Korean government eased the temporary restraints that had been imposed on beef imports. As a result of this measure, Korea's beef imports rose to 14,500 metric tons in 1988, roughly 10 percent of domestic consumption. This year, we expect beef imports to reach 39,000 metric tons, about 25 percent of domestic consumption. In addition, the government has relaxed restrictions on imports of citrus fruit, vegetable juice, and wine, to mention just a few other agricultural products. Moreover, just a few days ago the government announced an extensive liberalization schedule through 1991 for 265 farm products, of which some 70 items are of special interest to the United States. Thus, the disagreement with our American friends on this issue is largely a matter of timing instead of principle.

The point of contention regarding intellectual property rights is rather different. Here, I think, it is now generally conceded that Korea's new laws, enacted in 1987, are reasonably good on paper-indeed more comprehensive in some respects than similar legislation in many developed countries. Furthermore, many of these laws were written in such a way as to provide special protection for U.S. intellectual property rights.

Where doubts have been raised is in the area of enforcement, and admittedly some of these doubts are well founded. To deal with this critical issue of enforcement, the government recently created a special task force with a mandate to eliminate production and export of counterfeit goods.

Working with police and public prosecutors, the task force has already achieved encouraging results. In less than three months, 35 major offenders have been booked on charges of counterfeiting and trademark violations, and some $2 million in counterfeit goods have been confiscated. Nationwide, 900 special investigators have been assigned by public prosecutors' offices to press the campaign against counterfeiting to successful conclusion. We believe we can contain the problem at the level of a routine law enforcement matter.

In broad outline, these are the actions we have taken or will take to address U.S. trade concerns. Now, I would like to turn to a couple of areas in which the active participation of U.S. businessmen is required in order to achieve benefits for both countries.

For several years now, the Korean government and private sector have been actively promoting increased imports from the United States. The specific promotion measures include buying missions, foreign currency loans to importers, and special U.S. products shows in Seoul. Later this year, Korea Trading International, Inc., a subsidiary of the Korea Foreign Trade Association, plans to make available rent-free exhibition space for American exporters where U.S. products can be shown and contracts negotiated. But it's up to individual American businesses to take full advantage of these opportunities. As you all know, there's no substitute for effective marketing and salesmanship.

 
New Prospects of Cooperation in Reforming Countries
 

I would also like to draw your attention to another excellent prospect for increased bilateral cooperation as a result of Korean diplomatic initiatives toward some communist countries. In just the past few months, Hungary opened a resident embassy in Seoul, and Yugoslavia and the Soviet Union established a trade office, to be followed in short order by the opening of Polish and Bulgarian trade offices.

Probably of more interest to an American audience is the fact that Korea now does a flourishing trade with China, much of it conducted by direct sea transport. So far, we have barely tapped the range of possibilities for U.S.-Korean joint projects centering on the Chinese market, but the potential is surely enormous.

Eastern Europe offers a rather less expansive field for such projects, although even here there are opportunities worth exploring. For many years now, American and Korean firms have successfully operated a wide array of joint ventures in both countries. We have every reason to believe that this experience can be effectively "exported" to third countries.

I know that the Chamber has a long history of promoting U.S. economic ties with other countries, and so it is accustomed to taking a longer-term perspective than many individual firms and most governments are inclined to do. This is essential to a proper understanding of U.S.-Korean economic ties as with so much else. Clearly there are competitive and antagonistic as well as cooperative and complementary elements to our bilateral relationship. But there can be little doubt that the last two are enormously more important than the former in shaping that relationship. Otherwise, Korea could not have become America's seventh-largest trading partner and our two-way trade volume would never have reached the impressive sum of $34 billion.

The British novelist Dame Iris Murdoch once wrote that "human affairs are not serious, but they must be taken seriously." I think much the same could be said about U.S.-Korean trade frictions: In fundamental terms, they are not really serious, but we had better deal with them seriously lest they become unmanageable. If together we succeed in that task, then I am confident that the United States and Korea will continue to offer the world a model of economic cooperation transcending differences of culture, language, geography, and level of development.