Korea and Eastern Europe


Paper presented at the World Trade Centers Association (WTCA) General Assembly, St. Paul, Minnesota, October 4, 1990.


               I should mention at the outset that thus far my country's interest in the changes taking place in Eastern Europe is rather more political than economic. Understandably, our central concern is how these changes will impact on the communist regime in North Korea; that is to say, will the end of the Cold War in Europe reduce tensions on the Korean peninsula and help pave the way for eventual Korean reunification? As the Pyongyang regime becomes increasingly isolated politically, there is a distinct possibility that it may seek some kind of rapprochement with the south. Certainly it is no coincidence that just two months after President Gorbachev met President Roh in San Francisco, the North Koreans agreed to the first-ever South-North prime minister's meeting in Seoul. But further speculation in this direction would probably take me too far afield.

Both politically and economically, Korea's burgeoning relations with Eastern Europe are a very recent development. At the time of the 1988 Seoul Olympics, we had no formal diplomatic ties with any of those nations. Today, we maintain full diplomatic relations with all of the Eastern European states except for the Soviet Union, with which we have consular relations, and Albania, with which we have no ties. Moreover, following the Gorbachev-Roh summit, it is probably just a matter of time-a few months at the most-before the Soviet Union and the ROK exchange ambassadors.

It is worth noting, I think, that in almost every instance commercial relations preceded diplomatic relations in Korea's rapprochement with Eastern Europe. By the late 1980s, we had already conducted a modest trade with Eastern Europe for several years even in the complete absence of diplomatic ties. This may seem anomalous, but it is a situation fairly common in Asia. Even now, the ROK has no diplomatic ties with its third-largest trading partner, the People's Republic of China.

In 1988 we exchanged resident economic missions with Hungary and Yugoslavia, and full diplomatic relations followed shortly thereafter, Hungary being the first so-called East Bloc nation to open an embassy in Seoul in February 1989. Our business dealings with the Soviet Union are conducted through an office of the Korea Trade Promotion Corporation in Moscow and of the Soviet Chamber of Commerce and Industry in Seoul. Each of these offices houses a "consular department" that can issue visas and handle other routine consular business.

At this early stage of economic relations, Korean-East European trade has shown impressive growth. With the USSR alone, Korea's trade volume increased from $390 million in 1988 to $600 million in 1989 and is expected to surpass the $1 billion mark this year. With non-Soviet Eastern Europe, the figures are $215 million in 1988, $389 million next year, and a projected total of $600 million for 1990.

We recognize, of course, that the high growth rates of the past two years cannot be sustained indefinitely. Financing is already becoming a problem, given the serious shortages of hard currency in most Eastern European countries. However, there are significant differences between the pattern of our trade with the Soviet Union and with non-Soviet Eastern Europe. In our trade with the Soviets, we mainly import raw materials and export industrial equipment and some consumer goods. In resource-poor Korea, Soviet raw materials find a ready market, and we have more than adequate financing available. The demand for Korean manufactured goods is potentially very great in the Soviet Union, but, as I just indicated, shortages of foreign exchange keep effective demand well below its potential. As a result, Korea has been running deficits in its trade with the Soviet Union equivalent to 17 percent of total trade volume in 1988 and 31 percent in 1989.

By contrast, non-Soviet Eastern Europe has proportionately far fewer raw materials available for export, and its manufactured goods are at a competitive disadvantage in world markets, Korea included. Accordingly, our trade with the whole of that region is less than two-thirds that of our trade with the Soviet Union alone, and we sell much more to Eastern Europe than we buy. In 1988 and 1989, Korea recorded surpluses in its trade with non-Soviet Eastern Europe equivalent to 17 percent and 26 percent, respectively, of total trade volume.

For the next few years at least, these patterns are likely to persist. To put the matter bluntly, our prospects for trade with the Soviet Union are good because that nation has something that we want and need-namely, raw materials. However, we must be prepared to accept trade deficits if we wish to further develop that relationship. In the case of non-Soviet Eastern Europe, trade with Korea is likely to reach a plateau in the very near future, after which significant growth will depend on the ability of those countries to produce internationally competitive manufactured goods. There is also a very real possibility that Eastern Europe could emerge as a rival of Korea in certain low-tech fields such as basic consumer electronics. In this regard, I think that the other Asian NICs would take a broadly similar view.

There has been considerable discussion in the Korean business press about joint ventures between Korean and Eastern European firms, but to date not much has been accomplished along this line. The most attractive prospect would seem to be natural resource development in Soviet Siberia. This would be so formidable a project that Korea would probably want to participate in collaboration with Japanese and Western companies. But the Japanese are not likely to join in until the Northern Territories issue is resolved, and the West Europeans and Americans are currently much more interested in joint venture prospects in non-Soviet Eastern Europe. Thus we may have to wait for some time before conditions are ripe for launching ambitious multinational development projects in Siberia. On a much more modest scale, however, Korean firms have expressed interest in construction projects in Eastern Europe, especially factories and tourism facilities. Just recently, for example, plans were unveiled by Lucky-Goldstar to construct a petrochemical complex in the Leningrad area and by Daewoo to build a tourist hotel in Moscow. Both proposals are awaiting formal Soviet government approval.

I hope I have not conveyed too pessimistic an impression of Korean business prospects in Eastern Europe. Among most Koreans, the tendency is to exaggerate in the opposite direction, and so I feel that a corrective is needed. I recall, in this regard, the near euphoria among the American business community that greeted the "opening" of China in the 1970s. Exaggerated hopes soon led to bitter disappointment, until American businessmen learned to realistically assess the Chinese market. Above all, we must recognize that the economies of Eastern Europe will need to undergo years of painful restructuring before they can become effective competitors in the global economy. Moreover, we sometimes forget that a free market is a necessary-but not a sufficient-condition of economic prosperity.

I do not make these points in a spirit of pessimism. On the contrary, I too am optimistic about the long-term economic prospects for Eastern Europe, given the existence of a free market system and access to foreign capital and technology. As we have learned in the course of our own development process, optimism, to be useful over the long run, needs to be combined with realism and patience.