An Asian Perspective of the Current Trade Issues


Paper for the seminar sponsored by The Asia Society and the East-West Center, New York, September 24, 1985.


               The international trade system has been the cornerstone of unprecedented world economic growth over the last several decades. That system is now seriously threatened. The stresses and strains of recession and growing economic imbalances between nations have brought us to the brink of a trade crisis that preoccupies us all. The eyes of the world turn especially to the United States, watching to see if protectionist sentiment will win out. The situation is serious indeed and demands a concerted effort to find solutions.

The crisis we face is a real one-but I fear it rests on a number of misconceptions about both the nature of the problem and the role that America's trading partners have played. These misconceptions are dangerous. Not only can they lead us down the wrong path in seeking solutions-they can also lead us to confrontation at a time when we should be working closely together. So today I would like to briefly address what I believe is an urgent need to better recognize the root problems of current trade tensions. I would also like to make some distinctions between the attitudes and circumstances of some of America's trading partners, including Korea.

My comments today will, of course, reflect a Korean perspective on these issues. I must and do have Korea's interests in mind. But I would suggest that Korea's interests are not so very different from those of the United States. Korea values and relies upon the United States as a close friend and ally. The economic and security ties between us are strong. Korea wishes to see the United States sustain its economic health not simply because we are friends, but in our own self-interest as well. If the United States prospers, we all benefit; if the United States weakens, we all suffer.

Thus we have a dual concern about the protectionist winds blowing in the United States. We are, of course, worried about the direct effects on us of any move to protectionism by our most important trading partner. But we are concerned as well about the impact that protectionism would have on the United States itself. We suspect that such policies would create a backlash in the U.S. economy, thereby damaging American interests in the long run. This would be a setback for us all.

So, we need first to examine the nature of the problem. In the United States, the problem is often seen as one of fairness-and certainly, there is no shortage of unfair trade practices throughout the world. But there is a growing recognition that the cause of the U.S. trade deficit goes far beyond the import barriers and unfair practices of America's trading partners. Indeed, such practices are hardly a recent phenomenon. They have been a factor in the economies of both developing and developed countries for many years. In fact, many countries, including most in Asia, have gone a long way toward removing the barriers that were once erected to protect the infant industries in their developing economies. This is certainly true in Korea's case, as I will explain further in a moment.

Given that unfair trade practices are not new, and are actually less widespread than they were even five years ago, such practices cannot by themselves explain current trade tensions. Many economists-including leading American analysts-are now pointing to other factors. They are concluding that the far more critical problem is of a monetary and macroeconomic nature, going to the heart of the trade and current-account imbalances being experienced by the United States and Japan.

Their analysis is perhaps now becoming more familiar and can be summarized as follows. The internal budget deficits of the United States push up interest rates, thereby drawing foreign capital to the United States and keeping U.S. funds at home. This in turn drives the dollar far above competitive levels, seriously reducing the competitiveness of American industry at home and in world markets.

It is recognized that Japan has been an important factor in this scenario. In contrast to the United States, Japan has an extremely high savings rate (30 percent of GNP as compared to 17 percent in the United States), which creates an accumulation of excess funds domestically and drives interest rates down. This in turn encourages capital to flow out of Japan, weakens the yen, and produces a large trade surplus. It can almost be described as a situation of overinvestment in the United States and underinvestment in Japan, which has led to extreme dislocations in the exchange-rate relationship between the dollar and the yen and a sharp swing in the U.S. and Japanese bilateral and global trade balances.

So according to more and more analysts, such monetary and macroeconomic imbalances between the United States and Japan lie at the heart of the current trade issues. In this regard, I fully agree with former Japanese minister, Kiichi Miyazawa, when he stated recently in his address before the Council of Foreign Relations here in New York that "if we-the U.S. and Japan-can solve our bilateral trade issue, the global economy will benefit greatly, relieving it from protectionism." Unfortunately, however, the trade dispute between the United States and Japan remains unsolved and the serious bilateral tensions have spread to affect other countries in Asia.

In Korea we have a saying-"When two whales fight, the backs of shrimp are broken." I fear that may now be happening-that U.S. anger and frustration about the trade dispute with Japan is spilling over to other countries, including Korea, in a way that fails to recognize the different circumstances that apply.

I would like to say just a few words about those circumstances, and some of the misconceptions about Korea that seem to be gaining currency in the United States. First, it has been said by some that Korea is now a developed country and that it should therefore be assuming greater responsibilities in the international trading system. Unfortunately, however, Korea has not yet joined the club of developed nations. Although we may now be entering the group of newly industrialized countries, we still have some way to go. Korea's per capita GNP is only $2,000-far less than those of most Latin American countries and about one-fifth that of Japan. Korea is also carrying a foreign debt of $45 billion. At the same time, however, Korea spends more than 6 percent of its GNP annually on defense.

Nevertheless, Korea is assuming a greater level of responsibility in the world trading system, at a pace that is commensurate with its development. Through a series of import liberalization measure, Korea has been progressively opening her markets, and has been doing so at an earlier stage of development than many others. To illustrate, as recently as 1978, only 54 percent of internationally traded goods could enter Korea without specific government authorization. Today, our so-called import liberalization ratio stands at about 85 percent. We have made important progress in opening our markets, and our efforts will continue in the future. We see this as an integral part of our international responsibilities as a member of GATT. Korea has strongly supported the United States in its efforts to begin a new round of multilateral trade negotiations, and stands ready to address such issues as trade in services and the protection of intellectual property rights.

On another point, I would like to say briefly that it is also misleading to portray Korea as a country with "excess" trade surpluses, as is suggested by the sponsors of various import surcharge proposals. Historically, the balance of trade between Korea and the United States had been heavily in favor of the United States, and the surpluses of recent years are largely attributable to the high U.S. dollar. Globally, Korea had an overall trade deficit of $1.4 billion in 1984.

Most importantly, it is not accurate to suggest that Korea is a "second Japan," emulating that country's approach to international trade. Korea does admire Japan's success, and we do seek to emulate Japan's reputation for efficiency and product quality. But the similarities end there. The fundamental difference between Japanese and Korean development strategies is that Japan has striven for industrial self-sufficiency, while Korea has not. As a result, manufactured goods account for only 23 percent of Japan's total merchandise imports-by far the lowest among major industrial countries-whereas more than half of Korea's imports are manufactured goods. A self-sufficiency strategy may be feasible in the case of Japan but completely unrealistic in the case of Korea. In terms of relative economic strengths, comparing Korea to Japan is rather like comparing a dog to an elephant. Japan's GNP is 15 times larger than ours; Japan's per capita GNP is 5 times greater than ours; Korea's steel production is one-eighth that of Japan; Korea's shipbuilding capacity is one-third that of Japan; Korea's auto production is still in the beginning stage, while Japanese cars are dominating world markets. These are just a few of the circumstances that set Korea apart from Japan. Sometimes, however, we fear that these differences may not be fully recognized in the United States. As a recent article in the Wall Street Journal pointed out, and I quote, "In her anger at Japan . . . America risks punishing herself and other allies as much as-or more than-she punishes the Japanese."

Indeed, there is risk for us all if protectionism wins out. The first problem is that protectionist policies would not get to the root of the problem, which, I believe, must be traced to broader monetary and macroeconomic forces. Second, protectionism would only worsen the symptoms of the problem. If the United States were to close its markets further, a global contraction in trade would result, with U.S. exports inevitably weakening even further. If other countries, and especially the developing ones, cannot sell to the United States, they will not have the foreign exchange to increase their purchases of American goods and to service their external debts.

So we must ask, If protectionism is not the answer, what is? I think we must pursue a multilateral, cooperative course:

  • Certainly, developing and developed countries alike must take effective steps to open their markets and to reduce unfair trading practices;
  • The United States must continue to work to reduce its budget deficit, and bring interest rates down;
  • Japan must also open its markets and expand domestic investment;
  • The United States, Japan, and EC countries must work together to correct the current misalignment of the exchange rate system;
  • We must all work toward a new round of multilateral trade negotiations to jointly seek lasting solutions to the pressing trade problems that we face.

The most important point is that rather than setting a course for confrontation, we must begin pursuing the path of cooperation.