Implications of Globalization for Korea - U.S. Economic Relations

 

Keynote address delivered at the Conference on Globalization and Korea-U.S. Economic Relations, Korea Institute, Harvard University, September 9, 1995.

 

               Last month both Americans and Koreans were celebrating the fiftieth anniversary first of Japan's formal surrender in World War II on the deck of the battleship Missouri on September 2, 1945, and second of the restoration of independence from 36 years of Japanese colonial rule over the Korean peninsula. On this auspicious occasion, the new Korean War Memorial was dedicated in Washington by President Clinton and President Kim last July. This high-profile event served to remind both Americans and Koreans once again how deep and long-standing our friendship is and how close our partnership has become.

As the first U.S. troops landed in Korea in September 1945, there began a partnership that is, I think, unprecedented in the relations between two so very different countries and cultures.

 
From Dependence to Interdependence
 

The history and characteristics of this relationship since then have been described variously-as, for example, an "alliance of unequals" or a case of "hegemonic-dependency" or even as a "patron-client relationship." Koreans have usually preferred the simple word "partnership." All these terms convey something of the nature of the relationship, but none do it full justice.

Perhaps "partnership" isn't quite the word-at least not for the early stages of the relationship, given the high degree of dependency on the Korean side both militarily and economically. The United States saved South Korea from a communist takeover in the Korean War at the cost of many American-as well as Korean-lives and billions of dollars. In the postwar years, U.S. economic aid played a key role in the rehabilitation of the war-torn economy. Then, as Korea began its economic takeoff in the early 1960s, the U.S. role began to change significantly. Instead of being mainly a provider of economic aid, the U.S. became the principal source of private capital and technology as well as the major export market for Korea. Without these, my country could never have achieved the economic success it did. It is no wonder that Korea's phenomenal economic growth in the 1960s and beyond is often cited as a success story of U.S. foreign policy at the time of the Cold War.

In the past 10 or 15 years, U.S.-Korean economic relations have undergone another fundamental change-from dependency to something approaching interdependency. There are various reasons for this. The most important is undoubtedly Korea's emergence from the status of a successful developing country into the ranks of the newly industrialized nations, as symbolized by Korea's planned entry into the OECD next year. At the same time, the U.S. economy has been suffering from historically weak macroeconomic performance-large trade and budget deficits-combined with low productivity growth and a hollowing out in much of the traditional manufacturing sector. These U.S. economic weaknesses have been accompanied by a relative decline in America's global economic position, especially vis-a-vis the nations of East Asia.

This picture of Asian economic advance and U.S. economic retreat is often overdrawn. Nevertheless, by the mid-1980s it had become persuasive enough to convince many Americans, not least their political leaders, that trade barriers on the part of the East Asian nations were largely responsible for the chronic U.S. trade deficit. Thus, Washington began to increase its market-opening pressure on these countries, resorting to "neoprotectionist" legislation such as "Super 301," "Special 301," and other such trade law provisions.

South Korea was one of the targets of this campaign. In the second half of the 1980s, in addition to market-opening demands, Washington pressed Seoul to graduate from the GSP (Generalized System of Preferences) scheme, revalue the Korean currency, and agree to so-called voluntary export restraint on steel, textiles, apparel, and other products. Trade tensions mounted throughout this period, largely in response to Korea's growing trade surpluses with the United States, which peaked at nearly $10 billion in 1987. Obviously, these disputes were unhealthy for the relationship to the degree that they caused ill feelings and acrimony. On the other hand, they also showed that the U.S. and Korean economies were growing closer and more interdependent. After all, when the surface area of contact between two bodies expands, the points of potential friction necessarily increase as well.

Korea, for its part, had only limited means of responding to U.S. trade pressures, other than emotional appeals harking back to the Korean War experience. Given the tremendous disparity in the size of the two economies and the importance of the U.S. market to Korea, at the end of the day Seoul had little alternative but to accede to Washington's demands. Whether for good or ill, the U.S. approach has been effective. In the words of one former American trade official, "using negotiation and the threat of retaliation under U.S. trade laws . . . produced positive results." In this respect, Korea provided another success story for U.S. trade policy.

 
Wave of Globalization
 

This brings me to the present and, in particular, to a key topic for this conference-"globalization." Globalization, or seghewha in the Korean language, has become almost a household word in Korea ever since President Kim Young-Sam declared it to be the overall policy goal of his administration in November 1994.

Globalization involves the close integration of a given national economy in the world economy. To some extent, it requires a willingness to surrender certain national prerogatives to multilateral bodies such as the WTO. The advent of microelectronic-based information technologies, the spread of multinationals and their global networking, and the global linkage of financial markets can be cited as major factors facilitating and spurring a new wave of globalization. The globalization was further facilitated and stimulated by government policies, such as deregulation of markets, or removing barriers to international competition in trade, investment, and so on. However, the real driving force of globalization comes from the actions of individual economic agents including firms, banks, and people usually in the pursuit of profit under the pressure of competition. This is why some economists view globalization as basically a microeconomic phenomenon.

 
Challenges to Korea
 

Translated into the Korean context, globalization calls for sweeping deregulation of business activities and reduction of barriers to imports and capital flows. In fact, even before President Kim took office, various reform measures had been introduced, though much remains to be done. At the heart of the problem is the fact that while internal deregulation is incomplete, Korea is being hard pressed for full external deregulation, causing a greater burden of adjustment.

No doubt globalization poses a great challenge to Korean industry. For one thing, big businesses must find ways to survive in the dynamics of global oligopolistic competition. Major difficulties arise in getting access to key technologies needed for competitive production. Western countries, including the United States, have been limiting their technology transfers to the NICs for some years now. And Japan has never been particularly forthcoming in this regard. Although Korea has a very strong manufacturing base, it still lacks the scientific and engineering capability required to develop its own technologies in a wide range of applications.

Admittedly, Korean companies seem to be doing well at present in their exports of such products as semiconductors, automobiles, ships, and electronic goods. But this is largely owing to the appreciation of the Japanese yen. The real test for these export industries will come later when the yen returns to a more realistic level.

Korea's small and medium-sized companies face more immediate problems. Since the late 1980s, they have been badly hit by rising labor costs as well as by stiff competition from China and the ASEAN countries in their traditional labor-intensive product lines. They have yet to find new lines of production based on cutting-edge technology and flexible management. Many of them have shifted production facilities abroad to take advantage of lower labor costs there. However, this strategy has been challenged by the trend toward intraregional sourcing on the part of leading companies within the OECD countries. Thus, smaller Korean firms need to find a better way of integrating themselves into the new system of an international division of labor based on changing comparative advantage and of taking part in the networking of multinational companies at home and abroad.

 
Challenges to the United States
 

The United States is also challenged by globalization, though not as acutely or in the same way as Korea. Permit me to comment, from an outsider's perspective, on two of the more important of these challenges-one largely resulting from internal causes, and the other external in origin.

On the domestic side, the United States needs to remedy its serious macroeconomic imbalance, which takes the form of huge and seemingly chronic fiscal and trade deficits. Most economists would agree that, at root, their cause is a shortage of domestic savings or, in other words, an excessively low savings ratio. Some Americans take comfort from the fact that these twin deficits are no longer growing and are actually shrinking somewhat. But the rest of the world thinks otherwise, as shown by the steady erosion of the dollar as the world's key reserve currency. It is not enough that these deficits merely cease to grow; rather, they must be substantially reduced, if not altogether eliminated, within a credible time frame. It is no small irony that the United States-once the largest capital lending country in the world-has turned to a capital borrowing country from Asia to make up its fiscal and trade deficits.

A simplistic analysis would suggest that a much weaker dollar would solve the problem of America's trade deficit. Yet that hasn't happened in the case of U.S.-Japan trade despite a 70 percent devaluation of the yen against the dollar since the Plaza Accords in 1985. In fact, a general flight from the dollar as the world's reserve currency would wreak havoc with the U.S. and world financial systems and devastate global trade. That process may already have started. It must not be allowed to go unchecked.

Another important challenge to America comes from the rise of East Asia in terms of industrial competition and in the security realm as Japan and China loom increasingly larger as economic and military powers, respectively. Other countries in the region are also making rapid economic advances and will begin to claim a more equal footing with the United States in dealing with bilateral and multilateral affairs. According to one estimate, East Asian countries together will have an economy larger than that of NAFTA in a decade, producing 55-60 percent of the new wealth that the world economy will generate over the next decade.

How the United States responds to the changing conditions in East Asia is a critical question not only for East Asia, but also for the rest of the world in terms of economic and security relations. In a speech given in Tokyo during the G-7 summit, President Clinton stated that the new Pacific community rests on the principles of open markets, open and regional economies, supporting democracy, and reaffirmation of the American presence in Asia. However, the major challenge for Washington is how to articulate and integrate policies to pursue these economic, value, and security principles.

In this connection, there is a growing perception in Asian countries today that Washington is overly preoccupied with product-specific trade issues at the expense of the broader question of harmonizing overall relations with Asian counties in terms of economic and security interest. On my side of the Pacific, it is generally believed that the adjustment burden imposed by globalization is much greater for us than for the United States. After all, it is American companies, not Korean or even Japanese ones, that have set both the rules and the pace of globalization. In this light, it is said that if the United States chooses to exert too much pressure unilaterally on Asian countries in behalf of narrow business interests, it may serve to incite nationalist sentiment in the Asian people, driving them toward their own economic and political nationalism.

In a broader perspective, we have also an apprehension that the process of globalization may inevitably involve a "cultural clash" between the West and East. For example, trade conflicts between the United States and Japan in recent years have clearly revealed that cultural differences lie at the heart of many of the trade issues. Minimizing cultural friction in the course of globalization is another challenge for policy makers of the Asian countries as well as the United states.

 
Implications
 

What, then, are the implications of globalization for the U.S.-Korean economic partnership? Let me try to identify several.

First, globalization, as embraced by the Korean government, will accelerate the opening of Korea's markets for goods and capital, irrespective of outside pressure. Deregulation will make formal market opening much more of a practical reality, especially for the foreign investor. The government's commitment to OECD membership provides an especially strong incentive to Korea's continued liberalization.

Second, somewhat paradoxically, the U.S. and Korean economies are becoming more interdependent even as each partner is taking a smaller share of the other's exports. This is especially striking with regard to Korea's export dependence on the U.S. market, which is now roughly half what it was in the mid-1980s. Even so, America remains Korea's most important export market, just as the United States continues to be Korea's major source of imports, from the most advanced technology to the most basic foodstuffs and raw materials.

Yet the figures for simple merchandise trade fail to convey the complexity and range of economic interactions that link the United States and Korea. In the age of globalization, an industrial component, for example, can be designed in one country, manufactured in another, sent to a third country for the final assembly process, and marketed throughout the world. It is this pattern of interaction-yet even more complex-that will increasingly shape the U.S.-Korean economic partnership.

Third, globalization pressures will lead to increasing business tie-ups between Korean and U.S. firms, as entrepreneurs seek to combine American high technology with Korea's strong manufacturing base. This is already happening to a large extent. In the telecommunications field, for instance, nearly all the major U.S. companies have established business ties with Korean partners in the form of licensing agreements, original equipment manufacturing or OEM, joint investment, joint research and development, and secondary sourcing. This trend is now expanding into the fields of aviation, biotechnology, and medical equipment.

The products of such technical tie-ups can and are being marketed all over the world and are sometimes even jointly produced in third countries. A case in point is the semiconductor plant in Portugal that was set up jointly by Samsung and Texas Instruments, producing Samsung's mainline chips for sale in the European market. It is also noteworthy that as a way of breaking through the technological barrier, some Korean companies are working directly with American technical staff in their own U.S.-based research facilities.

To date, most of these technical tie-ups have taken place between big Korean firms, or chaibol, and American firms of comparable size. It is to be hoped that such cooperation can be extended to small and medium-sized companies of both countries, where the need is often greatest.

Fourth, in the age of globalization, U.S. investment in Korea should be viewed in a new light. Korea can be important for U.S. companies not only as a sourcing base, but also as a production and marketing center for the burgeoning Asian market. The Chinese market, adjacent to Korea, is particularly attractive, despite current strains in the Sino-American relationship.

Korean firms are experienced in dealing with both Americans and Chinese. In fact, Korean businessmen were active in China a decade before formal diplomatic relations were established in 1992. Three-way business talks are currently under way between U.S., Korean, and Chinese companies in the areas of power generation, transportation, and steelmaking, among others. This is surely a sign of things to come.

Fifth, the United States and Korea, in order to realize the mutual benefits of globalization that I've just outlined, have a common interest in promoting free trade and open markets. As globalization and free trade are mutually reinforcing, support for one logically implies support for the other. In a practical sense, such support will take rather different forms in our respective cases.

For the United States, it requires a willingness to rely upon the multilateral dispute settlement mechanism of the WTO instead of resorting to unilateral measures. As unilateralism is often a kind of protectionism, it has no proper place in a globalizing economy. In the case of Korea, support for free trade begins at home. Much has been accomplished in this regard, but much more remains to be done-and the sooner the better.

Sixth, let me address the concerns of some observers that regional trade bodies like the EU, NAFTA, and APEC could weaken globalization. As a recent WTO report concludes, there is little or no evidence of such an effect to date. On the contrary, the influence of the major regional groupings was instrumental in bringing about a successful conclusion to the Uruguay Round. Of course, in extreme circumstances, these and other regional bodies could turn inward, perhaps even adopting a cultural or racial coloring in some cases. This is most unlikely. But we must guard against such a possibility by maintaining and augmenting the strength of the WTO and the multilateral free trade system of which it is the linchpin.

 
Concluding Remarks
 

Let me conclude my remarks by saying that Korea-U.S. economic relations have changed over time from total dependence to a relationship dominated by interdependence. Interdependence remains asymmetric, however, with Korea much more dependent on the United States-not only in economic matters, but for security concerns as well. This reality will continue to define economic relations between the two countries in the age of globalization. It is, therefore, natural for Korean people to expect that the United States will continue to play a leadership role in international affairs in a manner where "the strong is just and the weaker is protected." Both counties are currently facing major challenges created by a new wave of globalization. Certainly there are many areas in which Korea and the United States can and will work together to meet these challenges for our mutual benefit based on the strength of the traditional ties of friendship, understanding, and experience. What is most important for Americans to remember in this regard is that Korea remains their closest and most reliable partner in the world's most economically dynamic region. With such highly complementary economies, the United States and Korea are natural economic partners. Though this relationship has developed unevenly, its underlying strength has never been in doubt. Now is the time to build upon that strength as we prepare to begin a new era of bilateral cooperation in the age of globalization.