Economic Partnership between Switzerland and Korea

 

Paper for the Swiss-Korean Chamber of Commerce, Zurich, September 27, 1989.

 
The Pacific Basin Economies
 

             Today, I want to talk mainly about how our two countries can create a stronger and closer economic partnership by combining their respective strengths and achievements, with particular reference to Swiss business opportunities in Korea. Before turning to this subject, I would like to briefly review the recent performance of the Korean economy and discuss some of the challenges we face.

During the last three years, the Korean economy experienced extraordinary success: our GNP grew at an annual rate of 12 percent, and inflation rates remained stable and low, 2-3 percent, during 1986-1988. In addition, since our first trade surplus in 1986, following decades of chronic deficits, the surplus increased to U.S. $9.8 billion in 1987 and $14 billion in 1988. The expanding surpluses enabled Korea to greatly reduce its foreign liabilities, from $47.6 billion at year-end 1985 to $31.2 billion by year-end 1988, and thereby Korea's net foreign debt (liabilities) fell to only $7.3 billion by year-end 1988.

However, not all Korea's economic news was good. Korea faced several major challenges both externally and internally during the period 1986-1988: protectionism abroad took a heavy toll of Korea's export trade; substantial appreciation of the Korean currency against the U.S. dollar and substantial large wage hikes eroded our international competitiveness. These factors have combined to drastically slow Korea's economic growth rate in 1989.

Despite the new trend of slow growth of exports and GNP, the majority of Korean economists and businessmen remain optimistic. They believe that the challenges we face may serve to accelerate the inevitable adjustment of Korea's economy preparatory to a new phase of development. In short, they believe in taking one step backward for every two steps forward.

Now let me turn directly to the core of my presentation: our two countries' economic cooperation-its history, prospects, and potential.

In economic terms, Korea and Switzerland have some similarities: Both countries lack natural resources, and their economies depend heavily on foreign trade. Of course, Switzerland possesses a competitive edge in a number of high-tech industries, whereas Korea has a competitive advantage in more labor-intensive products as well as some technology-intensive goods.

Trade between Korea and Switzerland amounted to $820 million in 1988, which accounted for less than 1 percent of each country's total imports. Although the trade between our two countries remains much smaller than would seem warranted by the size and complementarity of our two economies, it has increased remarkably in recent years. During the last five years, Swiss-Korean trade grew by an annual rate of 35 percent, which was twice the rate of Korea's overall trade growth.

In addition to trade, Switzerland and Korea cooperate closely in a number of other areas. For example, Switzerland is Korea's fourth-largest source of technology transfers, and Swiss companies have invested more in value terms in Korea than those of any other European nation. Swiss firms such as Nestle, Sandoz, and Charles Jourdan operate flourishing businesses in Korea and have become household names among Koreans. More recently, tourism and business travel between Switzerland and Korea has sharply accelerated, stimulated in part by the 1988 Seoul Olympics. Just last May, Seoul attracted a record number of Swiss businessmen who came to participate in Swiss Expo '89 held at the Korea Exhibition Center.

At this point, I would like to mention four major factors that I believe are highly conducive to promoting Switzerland's economic ties with Korea.

First, the Korean economy is very dynamic. Although we expect about a 7 percent rate of economic growth this year, the rate could reach 10 percent if the challenges previously mentioned can be successfully overcome. This high rate of growth owes much to Korea's excellent human resources: innovative and aggressive entrepreneurs and relatively cheap yet hard-working and high-quality labor.

Second, the Korean government has carried out a wide-ranging policy of import liberalization since the early 1980s. As a result, our import liberalization ratio currently stands at 95 percent, and virtually all types of manufactured goods are freely importable into Korea. Moreover, the average tariff rate has now been reduced to 12 percent (11.2 percent for only manufactured goods) from 24 percent in 1983, and by 1993 it will be further cut to 7 percent-about the same as the level of the OECD countries. Various nontariff barriers are also being removed or lowered, and intellectual property rights are now strictly protected by means of strengthened laws and tougher enforcement measures.

Korea's economic liberalization program is not limited to trade in goods and services, but extends to foreign investment as well. Already, the foreign investment liberalization ratio has reached 97.5 percent in manufacturing industries and 79 percent for the whole economy. By 1993, an automatic approval system will be adopted for foreign investments. Also, the liberalization policy is gradually being extended to the services sector, where Korean firms generally lack competitive strength.

The most important type of liberalization, however, can be found in the Korean businessmen's change of attitude: Korean entrepreneurs have come to recognize the superiority of free trade over protectionism, even though the initial costs of liberalization can be high. As a result, Swiss traders and investors will have no difficulty finding like-minded partners in Korea.

Third, Korea is working hard to diversify its trading partners so as to reduce its heavy dependence on U.S. and Japanese markets. For instance, in 1988, the U.S. and Japanese share of Korea's total trade amounted to 55.2 percent. Japan was Korea's biggest import source with a 30.7 percent market share, and the United States was Korea's largest export market with a 35.3 percent share. This overdependence on two markets is a dangerous cause of trade instability. In particular, Korea's $8.6 billion trade surplus with the United States and $3.9 billion deficit with Japan have been the main cause of trade friction between Korea and those two nations.

By diversifying its import sources and export markets, Korea hopes to substantially reduce bilateral trade imbalances. This is one of the reasons why Korean businessmen are showing increased interest in European markets-looking for alternative suppliers to those in Japan and alternative buyers to those in the United States.

The last factor favoring increased Swiss-Korean economic ties is that Korea has begun to accelerate its long-term industrial adjustment process. This process has been underway for at least a decade, but in the last few years both goverment and the private sector have vastly expanded their efforts to raise the technological level of Korean industry by shifting the industrial structure and trade pattern from downscale, labor-intensive goods to upscale, technology-intensive products. This effort has been further stimulated by currency appreciation, wage hikes, and growing competition from other developing countries.

As Korean industry moves upscale, it will require increasingly large inputs of imported technology and foreign investment. The need is expected to be greatest in the small and medium industrial sector, which heretofore has tended to lag far behind large-scale industry in this regard. As Switzerland's small- and medium-sized firms are well known for their high technological level, many Korean companies are eager to establish close relations with them. The most promising product lines in this regard are machine tools, precision machinery, food-processing machinery, fine chemical pharmaceuticals, and medical equipment.

Economic cooperation between Korea and Switzerland need not be limited to just bilateral trade relations. Joint ventures between our two countries and other forms of cooperation in third markets are also of great potential importance to the future of our two countries' economic partnership. Thus far, these areas have remained relatively unexplored, but interest in them is growing in both countries.

Now is an especially opportune time to consider third- country joint ventures between Korea and Switzerland. In recent years, more and more Korean companies, including many smaller ones, have begun to transfer some of their labor-intensive production lines overseas. As a result, offshore investment and joint ventures by Korean firms are rapidly growing in number and value. It would seem to make good business sense to try to combine Korea's labor-intensive production expertise with Switzerland's offshore investment experience and high technologies.

In this connection, we should give considerable thought to the prospects for Swiss-Korean joint ventures in the socialist countries of Central and Eastern Europe. Switzerland, as a respected neutral nation, has always enjoyed relatively easy access to those countries. In the past two years, Korea has begun to establish trade relations and-in the case of Hungary-even diplomatic ties with Central and Eastern Europe. Thus there no longer exist any serious political obstacles to Swiss-Korean collaboration in the socialist countries, and that idea can now be considered solely on the basis of its commercial feasibility.

Of course, our two countries do not exist in isolation from our more powerful neighbors, though neither of us is a member of any regional trading bloc. As "independent traders," so to speak, we obviously have a common interest in preventing the regionalization of the world trading system. The recent U.S.-Canada Free Trade Agreement and the forthcoming Single European Market in 1992 draw our particular attention in this regard. Our best interest clearly lies in a strengthening of the multilateral disciplines of the General Agreement on Tariffs and Trade. This is precisely what the GATT Uruguay Round, now under way in Geneva, was intended to accomplish. Whether or not it will be successful remains in doubt. But I believe we can increase the chances of a favorable outcome by combining our efforts and coordinating our negotiating strategies at Geneva along with other nations committed to a strengthened GATT.

In these brief remarks, I have tried to convey to you my thoughts on ways and means of expanding economic cooperation between our two countries. I am convinced that with sufficient commitment and concerted effort, we can transform our bilateral relations into a model partnership between a developed and a developing country. This will require the active support and collaboration of business, government, and the academic community between in both countries. Most of all, Swiss and Korean businessmen need more contacts and precise, accurate information on each other's markets. This need can be largely met through increased exchanges of business missions, individual visits, and more frequent staging of trade shows. With these ends in view, I believe that the establishment of the Swiss-Korean Chamber of Commerce is both timely and important.

Before closing, let me emphasize that the Korea Foreign Trade Association is eager to offer its full support and assistance to the Swiss-Korean Chamber of Commerce. We can provide the Chamber or any of its member firms with a wide variety of business- and trade-related information at our headquarters in Seoul or our European branch offices in Brussels and Dusseldorf. I might add that the government-run Korea Trade Promotion Corporation maintains an office right here in Zurich, which can make available information of a similar nature. For those of you contemplating a trip to Seoul, I urge you to visit the new Korea World Trade Center, which includes within a single complex virtually every service or facility that a foreign businessman might require.