Implications of the U.S. - Japan Trade Imbalance to Korea


Paper presented at Carnegie Endowment for International Peace, Washington, D.C., May 25, 1979.


               For some ten years, the United States has incurred trade deficits vis-a-vis Japan. The size of the deficits also has increased progressively, reaching some $11.5 billion in 1978. The deficit during the first two months of this year seems to have been some $1.3 billion. This year's deficit could go up as high as $7.8 billion. America's trade deficit with Japan last year was close to 41 percent of her total deficit of $28 billion.

A chronic trade deficit of this magnitude is bound to create serious problems for any country. It makes people wonder about the stability of the dollar, and their lack of confidence is quickly reflected on the exchange market as we have seen in the past few years. What aggravated the situation was the fact that the imbalances hit the American economy at a time when stagflation and ever-rising energy imports left little room for the policy makers to cope with the problem.

Perennial and large trade deficits with Japan, as you know, constitute a problem that is shared by many other countries of the world. Except for a handful of oil or raw material exporting countries, others have had to deal with it. In the case of Korea, trade deficit with Japan has been the unchanging pattern since the very beginning of our trade with Japan. Lately, the gap has increased, although we were able to live with it thanks to our invisible surplus and small trade surpluses with many other countries. In 1962, our Japanese deficit was only $86 million. This figure reached $1.8 billion in 1977, or four times [shouldn't this be one-fourth?] our total trade deficit. On the one hand, our geographic and cultural proximity to Japan together with Japan's superb marketing and engineering technology made it easy for Japan to locate and supply a growing market in Korea in the face of our rapidly expanding economy. On the export side, however, even with our familiarity with the Japanese market, we could not export a large enough volume of light manufactures and primary products to match Japanese producers' goods and processed materials. The barriers set up against Korea's exportable products were often hard to overcome.

It is clear that we have a shared problem. And I think many other Southeast Asian countries will feel the same way, as they have been struggling with their respective deficits with Japan. I am not proposing the formation of a common front at this time. My purpose here today is to point out our major concerns over the problem, and to express our hope that the United States and Japan will find it possible to settle the bilateral problem in such a way as to preserve the basic structure of free trade.

The United States and Japan happen to be our two largest trading partners. Together, they account for some 52 percent of our exports and 59 percent of our imports. The two countries are the largest sources of foreign capital and technology. Also, Korea's security interests are bound to be affected by their mutual relations. Economically, there are a few specific reasons why Korea is concerned with the problems and the way they are being handled by the two countries.

One of our concerns, which actually has materialized since 1977, is that our foreign exchange burden goes up as the value of the yen rises against the dollar, because of the price inelasticity of Korean imports from Japan and the large amount of debt service requirements for Japanese capital invested in Korea. On top of this, Japanese exporters marked up their prices last year by about 20 percent on the average in order to recover their export profit loss expressed in terms of yen, which had been reduced by the devaluation of the dollar.

Another concern of Korea is the possibility of the United States taking restrictive trade measures that do not differentiate Korea from Japan. Some 25 percent of Korea's exports to the United States are already subject to various forms of nontariff barriers. If the United States fails to distinguish Japan from other Asian developing countries and adopts a blanket restriction against their exports or imposes a new quota against Korean products as a precondition for Japan's acceptance of "voluntary restriction," Korea, of course, becomes a victim of an unprovoked retaliation. As we say in Korea, "when whales fight, it is only the shrimp whose back will be broken." And if you tell us not to be near the fight-well, where can we go, even if we could somehow pick up the marbles?

Our next concern is over a possible trade skirmish. On matters of trade, I have noticed that one exclusion does not lag far behind another. If the United States takes a unilateral action against Japan, the Japanese government will find it extremely difficult not to reciprocate in kind given the high temperature of the Japanese feelings on this matter. Justifiably or not, many Japanese seem to hold a strong view that they have been manhandled since August 1971.

The United States and Japan together share some 32 percent of the world's combined GNP. Jointly, they account for some 20 percent of the world trade volume. Any disruption of their bilateral trade, therefore, will have an enormous negative impact on the rest of the world. And let us not forget that many other countries are much more dependent on foreign trade; they too, like the European Communities, might find it impossible to manage their respective economies without taking some protective measures. The present world trade regime is not immune from such a destructive chain reaction.

Of these concerns that I have just expressed, the last two represent potentially the most dangerous developments. I shall, therefore, take them up one by one. From what I know about the decision-making process in the United States, it may be politically more expedient for the United States to adopt a blanket restrictive trade policy that will have to be applied to other developing countries or to certain products without regard to their origin than to single out Japan as the target. Also, given the prevailing protectionist mood in this country, the distinction between the commercial policies of Japan and Korea may not be perceived as important enough. Already, one hears of "New Japans"-as if Korea and some other Asian developing countries are set to imitate the Japanese story. If this happens, Korea will, of course, become a victim of undeserved exclusion.

That is why I want to point out to you the fundamentally different nature of the two countries' external economic policies, particularly the ones applied to the United States:

  • Korea's trade surplus with the United States is small in size, constituting some 3.6 percent of the total U.S. trade deficit, and the surplus has not been a chronic phenomenon;
  • the surplus did reach the $580 million mark in 1978, but I am not sure this is a lasting trend. With our renewed emphasis on import liberalization, tariff reduction, and deliberate policy of encouraging the purchase of American goods and technology, the surplus may disappear this year;
  • Korea still is a developing country that needs to borrow abroad. It is essential for us to maintain a reputable debt-servicing capacity;
  • Korea has pursued a policy of trade diversification. Last year, the share of our exports to developing countries reached some 25 percent of our total exports and the share of our exports to the United States and Japan has gone down continuously since 1968; and
  • Korea has learned from the Japanese experience. We do not want to accumulate a chronic balance of payments surplus, nor do we believe it wise to engage in "storm" exports.

The trade issue between the two countries is of course a bilateral matter. We are hopeful, however, that they would take into consideration the following concerns in their dealings with one another:

  • the fundamental principle for the bilateral settlement should be trade expansion. In this regard, we hope that the parties will not modify the generalized free trade regime;
  • efforts to promote intra-industry specialization between the two countries should be given due consideration, but it should also be clearly understood that the goal is hard to accomplish given Japan's industrial structure;
  • rather, the ultimate solution may be formed in industrial adjustments of all countries concerned;
  • the surplus country should make an utmost effort to recycle the surplus earnings either through transfer payments or foreign investments;
  • the U.S. exporters could make more systematic marketing efforts to sell more in Japan; and
  • for her own long-term interests, Japan could review existing trade practices in order to make certain that they do not constitute nontrade barriers. They could also do more to develop their domestic market, for which they have the means.

Growth and development are basically a matter of human choice. If we let their contributing factors flow from where they are abundant to where they are lacking, while constantly striving to improve the absorptive capacity of the latter, we can maximize the value of our scarce global resources. The human role is in locating and removing barriers that have been set either by nature or by previous human activities.

Thus, the existence of a chronic trade surplus of a country is not by itself such an undesirable thing, provided the surplus country removes the artificial barriers set against the recycling of the surplus to deficit countries. This could be accomplished either through trade or capital transfer. During the past five years, for example, West Germany amassed an even larger trade surplus than Japan-30 percent more than the Japanese surplus for the period. However, the German deficit in transfer payments to other EEC members and their Associates amounted to an annual average of $6.1 billion. Japan's transfer payments deficit per year was only $350 million during the same period. As a result, the German current account surplus for the five-year period was only 66 percent that of Japan. During the past two years, the German surplus was only 45 percent that of Japan. This took place while West Germany's share of noncommunist manufactured trade increased from 16.8 percent in 1965 to 17.2 percent in 1976.

To conclude, there is a vast area in the world that is starved of needed productive factors. Whether they are channeled to the deficient areas through trade, aid, loans, or technology transfer, they will have to be put back into the economy of the country that provided them in the first place. We should therefore join hands to make the flow as natural as the air in the atmosphere. For that is how we have survived and prospered.