Korea and Europe : An Evolving Partnership

 

Paper for The Royal Institute for International Relations, Brussels, Belgium, April 14, 1988.

 

               Although I have had frequent occasion to address similar meetings in North America and Asia, I have had relatively few such opportunities in Europe. In 1981, I came to Europe on an official visit in my capacity as Korean prime minister, but my personal experience of the European continent is rather limited.

Nowadays, as chairman of the Korea Foreign Trade Association, I am primarily involved on a daily basis with economic and business matters. And so this afternoon I will focus my remarks on the economic side of the Euro-Korean relationship. But first I want to briefly provide some background on the Korean economy in the 1980s and the challenges it faces. I think this will help us to better understand the future of economic relations between Europe and Korea from the perspective of Korea's changing role in the global economy.

Major Challenges Facing Korea's Outward-Looking Strategy

In the current decade, the primary objectives of Korean economic policy have been stable growth and internationalization, toward both of which we have made noteworthy progress. Although the nation's rate of GNP growth has been lower than in the 1970s, it still averaged an impressive 8.9 percent annually from 1981 through last year. In both 1986 and 1987, the rate exceeded 12 percent. Equally important is the fact that inflation was held to less than 3 percent from 1983 through 1986. And even last year, when labor disturbances led to high wage settlements, the inflation rate was only 5 percent.

Stable growth with low inflation has been accompanied by an unprecedented opening up of the Korean economy to the outside world. As of April 1 this year, Korea's import liberalization ratio was 95 percent, compared with only 68 percent in 1980. This shows how far we have come in opening our market in just seven years.

Moreover, discretionary import restrictions such as the import surveillance system and various "special laws" are shortly to be abolished, the former in just a few months.

Foreign investment capital is also much freer to enter Korea, following enactment of a liberalized foreign investment code in 1984. Another piece of legislation, scheduled to take effect July 1 this year, will greatly strengthen the government's power to protect foreigners' intellectual property rights.

These outward-looking policies have served Korea well, and that is why they are being carried forward under the new administration. As you probably are aware, the new administration is firmly committed to building a more responsive, pluralistic democracy, while its top economic priorities are continued stable growth, wider-ranging liberalization, and a more equitable pattern of income distribution.

Yet continued progress in this direction will not be smooth or effortless, especially when both domestic and foreign policies are becoming much more sensitive to various sectoral interests and pressures in the wake of democratization under the new government. Our economy is much better prepared to meet global economic challenges than it was a decade ago-but the challenges we face are still formidable.

The most serious of these is the global spread of protectionism. Of course, this is a problem that adversely affects all trading nations, but Korea's economy is especially vulnerable because of its extreme degree of dependence on trade. We export about a third of our total production, and around 40 percent of our exports to advanced industrial countries are under some form of nontariff restriction. Actually, this figure grossly understates the problem, because protectionist measures such as antidumping actions have deterrent effects on trade that can't be quantified statistically.

At this point, many of you may be wondering if Korea's own market is really as open as official spokesmen claim. Since government statistics to this effect are often less than persuasive, let me quote the view of the prestigious Economist magazine. In the March 5 issue of this year, The Economist noted that at the beginning of the 1980s,

South Korea . . . protected its farmers and producers of other primary products heavily, but the average Effective Rate of Protection for its fast-growing manufacturing was extremely low-even before it began its more recent drive to liberalise trade. South Korea-in spite of all anecdotes to the contrary-really is proof that liberal trade policies work.

The second major challenge we face is the growing pressure on Korea to further open its agricultural and service markets. In fact, Korea is already a major importer of feed grains, wheat, and cotton. Yet except for wheat, it is true that Korea maintains substantial barriers to agricultural imports for household consumption. The reasons are, of course, political and social, as Europeans can well appreciate from their own experience. A fifth of our population still depend for their livelihood on farming, fishing, and stockraising, although the proportion has been greatly reduced from three-fifths in 1960. An influx of agricultural imports could cause a severe depression in the rural sector and seriously weaken our most important bulwark against radical political change. As Korea's farm population continues to shrink, the pace of import liberalization for agricultural products will increase, but not to the same degree that it has in manufacturing.

Our service industries are in an intermediate position between manufacturing and agriculture. Though their competitive position is weak internationally, with the possible exception of the construction sector, they have a good potential for improvement. Limited foreign competition in the home market would probably help our Korean services companies develop the competitive strength they presently lack. Accordingly, the Korean government is beginning to open up the services market on a significant scale. Last year, overseas insurance firms were licensed to do business in Korea, and this year foreign-based advertisers will follow suit.

A third major economic problem we face is the unbalanced pattern of our trade relations. Traditionally, Korea has depended heavily on two markets: Japan and the United States. In fact, about 56 percent of our total trade is carried on with those two countries. Japan is our principal import source, accounting for 33 percent of Korea's imports in 1987, while the United States is our major export market, taking in 39 percent of our total exports last year. Not only is this an unacceptably high degree of dependence on just two markets, it is also the source of our most serious trade imbalances. In 1987, our trade surplus with the United States rose to $9.6 billion, and our trade deficit with Japan totaled $5 billion. Since trade imbalances translate readily into trade frictions, economic ties between Korea and its two biggest trading partners have grown increasingly strained.

Korea Looks toward Europe

To solve this problem over the long run, it has become imperative for Korea to diversify and expand both its export markets and import sources. In practice, this means trading more with the EC, which is, after all, the world's single largest economic bloc. Actually, the trend has been moving strongly in this direction for the last several years. In 1987, trade volume between the EC and Korea rose 49 percent to reach $11 billion. This year it is expected to be a record $14 billion, nearly double the total for 1986. For the five-year period from 1983 through 1987, Euro-Korean trade grew at an average annual rate of 23.3 percent, compared with a growth rate of 15 percent in Korea's overall trade volume. Yet the European share of Korean trade is still only 14 percent, while the Korean share of European trade is less than 1 percent , indicating considerable room for expansion. We also need to improve the trade balance between Europe and Korea, which last year showed a $2 billion surplus for Korea.

As a result of concerted efforts by the Korean government and business community, substantial progress is being made in diversifying Korea's import sources toward Europe. The currency realignments of the last two years have provided another powerful impetus in this direction.

Because these efforts are still at a rather early stage, it's difficult to quantify their impact with any degree of precision. Retrospectively, perhaps five years from now, I believe we will be able to look back upon a major shift toward Europe in the direction of Korea's foreign trade. However, we do have some rather revealing statistics on actual transfers of Korean import sources from Japan to suppliers in other countries. I know that some Europeans criticize our import diversification program as largely a "buy American" campaign. But the facts prove otherwise. In 1986, the last year for which we have complete figures, some $270 million worth of Korean imports were transferred to non-Japanese sources, of which $125 million worth was imported from Europe and $103 million from the United States. The amount involved is small, but these figures are especially significant in view of the fact that Korea's trade surplus with the EC in 1986 was only about one-fourth the size of our surplus with the United States. I understand that the complete statistics for 1987 are likely to show a continuing trend in favor of Europe.

Moreover, I am convinced that Koreans would buy much more from Europe if European exporters adopted a more aggressive marketing profile in Korea. Of course, many European brand names command instant recognition in Korea. For example, no Korean bridegroom would be content if he did not receive a Rolex watch from his new father-in-law. By the same token, French designer goods are as popular among the middle and upper classes in Korea as anywhere in the world. But, for the most part, European exporters have thus far failed to match the marketing efforts of their Japanese competitors. There is no obvious reason why this should be the case, except that European firms have tended to ignore the Korean market, just as our companies have Europe.

My own organization, the Korea Foreign Trade Association, has become very active in promoting greater trade and technological cooperation between Europe and Korea. We have long maintained a branch office in Dusseldorf and have, since 1984, operated a one-man office here in Brussels. Earlier this year, we decided to upgrade and expand our Brussels office to become the coordinating center for all our activities in Europe. In recognition of its enhanced status, the Brussels office will be headed for the first time by a KFTA managing director. Let me urge you to direct your inquiries about doing business with Korea to this office, where they will be dealt with promptly.

Although I have spoken primarily about trade, I don't want to give the impression that Euro-Korean economic cooperation should be limited to that sector only. Trade will always be the centerpiece of our relationship, but investment can play an important supporting role. European investment in Korea is steadily increasing, though still ranking far behind that of Japan and the United States. Since our newly liberalized foreign investment law took effect in 1985, European firms have launched 86 new investment projects in Korea, involving a total capital commitment of $313 million.

It is also a sign of progress that Euro-Korean investment flows are no longer just one way. In the last three years alone, Korean companies have invested $13 million in 16 European projects. This figure represents more than five times the average annual rate of Korean investment in Europe for the 17 years preceding 1985.

Korean companies are increasingly interested in technical tie-ups with European joint-venture partners, no matter whether the actual projects are located in Europe or Korea. Our technological dependence on Japan and the United States has been as great as our trade dependence and equally in need of correction. Moreover, in many areas, European technologies are more appropriate to our specific needs than are Japanese or American ones.

European businessmen should also bear in mind Korea's location at the hub of the burgeoning East Asian/Pacific economic zone. In close proximity to both Japan and China, Korea has excellent transport and communications links with the ASEAN countries as well. As a marketing and distribution center for the entire East Asian region, few other countries are so well positioned.

Promising Future of Euro-Korean Economic Relations

Thus, economic relations between Europe and Korea are likely to continue expanding quantitatively, while assuming new and more complex forms. Yet despite Korea's rapid development in recent years, Europeans would be wrong to think of Korea primarily in competitive terms. Certainly there are competitive elements in the relationship. However, the Korean and European economies are basically complementary, rather than competitive, and likely to remain so for many years. As European firms ascend the technological ladder, Korean companies will surely follow them, but without seriously threatening Europe's technological lead. According to long-term projections by the Korea Development Institute, a government-funded think tank, the Korean import market is projected to reach $225 billion by the year 2000 and absorb an increasing proportion of Europe's most advanced exports. At the same time, Korean firms will assume greater importance as suppliers of parts and components to Europe, moving beyond their current role as exporters of consumer goods.

On the global stage, Europe and Korea can also be expected to cooperate more closely in shaping a freer and more stable world economic order. It is highly significant, in this regard, that Korea strongly supported the advanced nations' call for a new round of multilateral trade negotiations, and has taken an active part in the Uruguay Round. As our relative weight in the world economy has increased, so also are the responsibilities we are assuming commensurate with that enhanced role. In these and many other ways, Europe and Korea will move from the periphery closer to the center of each other's global economic involvements. This is certainly a welcome prospect for Koreans, and I hope equally so in Europe.