Korea - Canada Trade Relations

 

Paper for the Pacific Business Outlook Conference at the University of British Columbia, Vancouver, Canada, November 20-21, 1986.

 

               Looked at from the Korean side, two-way trade between our two countries reached a level of 1.8 billion U.S. dollars in 1985, consisting of $1.2 billion in exports and $600 million in imports (see Tables 1 and 2 attached). Although these figures do not fully reflect our bilateral trade potential, considering the overall trade volume of our two countries they indicate quite an impressive growth since 1960, when our two-way trade volume hovered around a few million dollars.

The trade balance between our two countries has undergone cyclical changes during the past 25 years. Korea ran chronic deficits with Canada throughout the 1960s, followed by a period of surplus until the end of the 1970s. During the 1980s, Korea's trade account with Canada went into deficit in the three consecutive years from 1980 to 1982, then reverted to a surplus every year until 1985. The surplus is likely to persist at least for a time given the present product mix of Korea's exports to Canada.

There is no doubt that Korea is one of the most rapidly growing markets in the world for her trading partners, including Canada. Korea has emerged in less than three decades since 1960 as the world's twelfth-largest trading nation, with exports and imports roughly in balance at about $35 billion each. With a population of 42 million, the Republic of Korea has more than twice as many individual consumers as Taiwan and 16 times more than Singapore. Korea's current gross national product of about $82 billion ranks third in East Asia-behind Japan and China-and is projected to grow by a healthy 7 to 8 percent average annually over the next decade. This implies that Korea's domestic market will expand rapidly in the years ahead, providing growing business opportunities to foreign as well as domestic firms.

Of course, trade opportunities in Korea for foreign companies depend on, among other factors, the degree of openness of the Korean market. In this regard, I am pleased to note that the Korean government has consistently pursued a policy of import liberalization since 1978 in order to improve industrial efficiency and price stability at home, while assisting international efforts to protect the relative openness of the world trading system from protectionist pressures. As a result of a series of liberalization measures taken thus far by the government, some 91percent of the items listed in a standard index of trade commodities can now freely enter the Korean market. Although some kinds of import barriers still exist in Korea, there is no doubt that the Korean market now is remarkably open to foreign products and will become more so in the years to come. I may also add that the Korean government has been following its preannounced schedule of tariff reductions, which calls for a further lowering of the average tariff rate from the present 21.3 percent to 18.1 percent in 1988.

What, then, will Canada be able to sell in the ever-growing Korean market in the coming years? I cannot pretend to be a prophet in this regard. But a closer look at the Korean import structure may provide some clues. In a broad classification of Korea's import items, two categories of products stand out as most relevant to Canadian suppliers (see Table 2). As a country with limited natural resources, Korea heavily depends on imports for such key raw materials as crude oil, coal, timber, pulp, cotton, wheat, and raw hides. Although Korea's import of these products has been heavily skewed toward the United States for historical reasons, rapid progress is being made in diversifying our import sources to other countries. This can be seen, for example, in the changing composition of Korea's imports from Canada in the recent years. Specifically, Korea's top ten import items from Canada in 1985 include: coal, sulphur, timber, pulp, aluminum scrap, metal ore, and raw hides. Korea's rapid industrialization will surely increase its demand for these primary products in the years to come.

Another major Korean import category is sophisticated industrial machinery, including transportation and communication equipment, electronic products, precision machine tools, and chemical components. Korea's heavy dependence on the Japanese market for these products and our resulting chronic trade deficits with Japan have been among the major concerns of Korea's external economic policy. As the situation has recently become even more aggravated, the Korean government and business community are making conscious efforts to divert Korea's imports away from Japan to other countries, especially to North America, with which Korea has been running trade surpluses, taking advantage of the foreign exchange rate realignment following the G-5 agreement in September last year.

For example, my organization, KTA, recently conducted a survey of its members to assess the effect of the currency realignment on market diversification. More than 30 percent of the firms surveyed replied that they would divert their import sources from Japan to North America and Europe if the current exchange rate relations among the dollar, yen, and won remained stable.

Korean imports from Canada of items considered prime candidates for source diversification have so far been modest, despite Canada's advanced technology and high-quality products. Canada's major problem in penetrating the Korean market seems to be its competitive position vis-a-vis Japan. Obviously Canada, like the United States, is handicapped by the long shipping distance as well as cultural barriers. However, our survey indicated that there are other barriers that discourage Canada's exports to Korea, and therefore Korea's market diversification efforts. For instance, many firms surveyed claimed that North American suppliers are generally slow to respond to business inquiries and slow in delivery of merchandise ordered even if allowance is made for the additional time required by the long shipping distance, whereas the Japanese reply and deliver promptly; that Japanese after-service in Korea tends to be quicker and more efficient than that provided by North American companies; and that Japanese products continue to be cheaper than the North American products despite the more than 40 percent appreciation of the yen since the end of the last year.

Needless to say, how much you sell in a foreign market is also closely related to how much you buy from that foreign market. Business opportunities in trade, therefore, vitally depend on the degree to which the international trading system remains open to all trading nations. Unfortunately, however, there is no indication that the current protectionist tide is abating. To cite the case of Korea, more than 40 percent of our exports are currently subject to various forms of restriction on the part of our major trading partners. With respect to bilateral trade between Canada and Korea, I might add that we have documented 19 cases of restrictions imposed on Korean products coming to Canada in the form of antidumping duties, bilateral quotas, global quotas, and other so-called safeguard measures, plus three additional cases of antidumping allegations now under investigation.

It is gratifying, however, to note that a new form of economic cooperation has been developing between the North America and Asian NICs that could be an answer to the problem of trade friction between the parties involved. It is that increasingly, direct investment abroad is becoming a two-way street, like trade, between the North American countries and the Asian NICs. A growing number of Korean companies, for example, have been setting up manufacturing plants in North America in order to spread the benefits of production and employment to the countries where the end products will be marketed. The joint investment in automaking between Canada and Korea is a case in point.

Conversely, increasing numbers of American companies continue to invest in Korea jointly with Korean companies to produce not only for the Korean market but also for their home markets as well as the large markets of Korea's populous neighbors. These companies can take advantage of geographical proximity to other Asian markets including China, highly competitive wage rates, and a relatively good economic and social environment-all of which are found in Korea today. Such developments are reflective of the dominant trend in world commerce today toward "horizontal"-or intra-industrial-coproduction as opposed to the traditional or "vertical" exchange of raw materials for manufactured goods.

In this connection, it is regrettable that at present there is only one Canadian company (Dennison Manufacturing Canada Inc.) based in Korea. I would certainly urge other Canadian companies to explore business opportunities in Korea for joint ventures, given the advantages I just mentioned.

Thus Canadian companies, I believe, can find good business opportunities in Korea not only in trade but also in the area of direct investment or industrial coproduction. Koreans are proud to have shed the chrysalis of underdevelopment and to have taken their place as full-fledged participants in the global economy. But they also recognize that they could not have accomplished this task in isolation. At every stage of Korea's recent history of development, cooperation with overseas partners has played an especially critical role. In the future, this role can be expected to increase in importance as Korea approaches the threshold of advanced industrial status. Therefore we will continue to welcome foreign participation in our own economy, just as we in turn hope to participate actively in the economies of our partner countries.



Table 1. Korea's Major Items of Exports to Canada
 ( In Million U.S Dollars )
 
1980 1985
Ranking Commodity Value % Commodity Value %
1  Clothings 77  22.6   Mortor Vehicle 465  37.8 
2  Electronic Goods 56  16.4   Textiles 300  24.4 
3  Footwear 39  11.4   Electronic Goods 122  9.9 
4  Iron & Steel 23  6.6   Footwear 51  4.1 
5  Systhetic Resine,  Bags 13  3.7   Iron & Steel 48  3.9 
6  Leather Goods 10  2.8   Toys, Dolls 26  2.1 
7  Toys, Dolls 2.6   Electric Products 25  2.1 
8  Meta; Kitchene  Utencils 2.6   Raw Hides,  Skins,Leather  Goods 24  2.0 
9  Systhetic Fabrics 2.3   Systhetic Resin Products 25  2.1 
10  Rubber, Tires,  Tubes 1.8   Metal Products 19  1.6 
   Sub Total 250  72.8   Sub Total 1,105  89.9 
   Grand Total 343  100.0   Grand Total 1,229  100.0 
Note: % denotes Composition Ratio to Total Exports.
Source: Ministry of Commerce and Industry



Table 2. Korea's Major Items of Imports From Canada
 ( In Million U.S.Dollars )
 
1980 1985
Ranking Commodity Value % Commodity Value %
1  Coal 71  18.8   Coal 223  35.4 
2  Lumbe & Wood  Pulp 45  11.8   Sulpher 64  10.2 
3  Machinery 40  10.6   Wood Pulp 46  7.3 
4  Fertilizer (potassic) 27  7.1   Alcohol 40  6.3 
5  Concentracted  Roasted Iron 26  6.9   Fertilizer (potassic)34 34  5.4 
6  Sulphur 24  6.3   Hydrocarbons 27  4.3 
7  Aluminum Waste &  Scrap 22  5.8   Aluminum Waste :&  Scrap 18  2,9 
8  Raw Hides & Skins 15  4.0   Metallic Ores 14  2.2 
9  Vegetbles Oil 13  3.4   Semi-Conductors 14  2.2 
10  Nickel 11  2.9   Raw Hides & Skins 1.9 
   Sub Total 294  77.7   Sub Total 492  78.1 
   Grand Total 378  100.0   Grand Total 630  100.0 
Notes: % denotes Comosition Ratios to Total Imports
Source: Ministry of Commerce and Industry