The Peninsula

10 Issues to Watch For on The Korean Peninsula in 2015

By Mark Tokola, Troy Stangarone, and Nicholas Hamisevicz

Last year saw a series of significant events on the Korean peninsula. On the economic front, South Korea concluded free trade agreements with Canada, New Zealand, Australia, and Vietnam, and reached substantial conclusion on a deal with its largest trading partner, China. While inter-Korean relations avoided the pitfalls of 2013 when the Kaesong Industrial Complex was closed for nearly half a year, the hope that a surprise visit by senior North Korean officials to the Incheon Games would lead to deeper dialogue with North Korea has yet to be fulfilled. With more work to be done on the trade front and in inter-Korean relations, here are 10 economic and foreign policy issues to follow in the year ahead:

Dealing with North Korea in 2015

It has been said that the more things change, the more they stay the same and 2014 was a year where relations with North Korea often seemed like change but more of the same. From the family reunions to the visit to the Incheon games by senior North Korean officials, opportunities to build on the relationship soon fell back to familiar patterns. Will 2015 will be another year such year for the U.S.-ROK alliance and its relations with North Korea?

While North and South Korea are trying to find ways to have inter-Korean meetings, the two sides are having trouble agreeing to terms for the meetings. Once more military exercises start up, it will be even more difficult for inter-Korean relations to progress.

At the same time, reports suggest North Korea continues to improve its missile and nuclear weapons capabilities. Last year the United States indicated it would like to deploy THAAD, Terminal High Altitude Defense, systems on the Korean Peninsula to help protect U.S. troops and South Korea from missile attacks by North Korea. This prompted debates in South Korea about if the deployment of U.S. missile defenses would make South Korea safer, more vulnerable to attack, or draw it into bilateral tensions between the United States and China, as well as Russia to a lesser extent. South Koreans also discussed whether their country should build their own missile defense system. A slight compromise would be to have the systems on U.S. bases in South Korea. Whatever the determination is for the U.S.-Korea alliance, North Korea will likely continue to improve its missile and nuclear weapon technology and therefore keeping the issue of missile defense at the forefront in 2015.

Key Summits in 2015

This year will also bring a series of potentially critical summits between the leaders of Asia. Possibly the most intriguing is the potential for Kim Jong-un to make his first overseas visit as the leader of North Korea. Russia invited Kim Jong-un to attend a ceremony in Moscow on May 9^th celebrating the end of World War II. Reports suggest Kim Jong-un has likely accepted the invitation. At the same time, Russia has indicated that it has extended an invited Park Geun-hye and Xi Jinping as well, raising the question of whether either would choose to meet with Kim Jong-un bilaterally.

What are the prospects for a Park Geun-hye – Kim Jong-un summit in 2015? The Russia visit would be the best opportunity, but that might be politically difficult for Park despite more than 80 percent of Koreans indicating in a recent Asan Institute survey that an inter-Korean summit is necessary.

In May, Japan’s Prime Minister Abe Shinzo will likely visit the United States. If he visits, the U.S. is likely to quietly encourage Abe to make a positive statement on the anniversary of World War II that would help bring countries closer together rather than remain distant because of historical issues. Korea will be watching this visit closely for comparison with Park Geun-hye’s visit in 2013 and interpreting the level of support the U.S. gives to Japan.

Another summit to look for is a trilateral summit between Korea, China, and Japan. At the end of 2014, Park Geun-hye suggested the resumption of trilateral summits. This would be a welcome move, especially because both Xi and Park seem uncomfortable with a bilateral meeting with Abe. If this occurs before Abe’s statement on World War II, the hope would be the two sides actually try to talk about areas of cooperation moving forward, especially a China-Korea-Japan FTA. However, a discussion that only focused on the historical challenges in the region could encourage Abe to make a statement more to his personal belief rather than for the betterment of Japan both domestically and in foreign relations.

It will also be interesting to see if India’s Prime Minister Narendra Modi makes it back to Northeast Asia in 2015. His positive relationship with Abe is well known. Park Geun-hye has only met Modi on the sidelines of an East Asia Summit meeting in November, where she invited him to South Korea. South Korea and India have been doing a better job of having high level meetings between officials, and a summit meeting between the two leaders would demonstrate a commitment to that effort and to improving relations.

Korea-Russian Relations

Russia may find tactical advantages in its recent diplomatic outreach to North Korea.  Russian spokesmen have confirmed that an invitation has been issued to Kim Jong-un to visit Moscow on May 9 to attend the 70^th anniversary of the end of World War II.  Russian gestures towards North Korea demonstrate to foreign countries and to the Russian public that Russia is not without friends, despite its increasing isolation.  The outreach may also be intended to signal to U.S. and to the EU that their economic sanctions against Russia carry global costs.  Russia can hope for an economic lifeline from China in terms of energy contracts, and can offer North Korea a lifeline of its own to counterbalance the diplomatic and economic pressure the DPRK is experiencing from the West.

However, Russia’s long-term strategic interest is better served by a cooperative relationship with South Korea rather than the DPRK.  Russia’s trade with South Korea is vastly more important to the Russian economy than are its ties to North Korea.  Furthermore, as China has experienced, being associated with the DPRK’s eccentric, brutal and uncooperative regime bears an ongoing reputational cost in world opinion.  For its part, the ROK would like to ensure that Russia does not serve as an impediment to its project to peacefully unify the Korean peninsula.  Behind the headlines of Kim Jong-un’s possible visit to Moscow, look for increasing, practical cooperation between Russia and the ROK in 2015.

Relations Between Korea and Japan

This year marks the 50^th anniversary of diplomatic relations between South Korea and Japan. Combined with 2015 being the 70^th anniversary of the end of World War II, there is anticipation and hope that these two occasions can be an impetuses for better relations in Asia, especially between Korea and Japan. The biggest hope is for a bilateral summit meeting between South Korean President Park Geun-hye and Japanese Prime Minister Abe Shinzo. With Prime Minister Abe promising a statement on the anniversary of the end of World War II, it wouldn’t be surprising if President Park waited until after the assessment of that statement to consider meeting with Abe. There is a sense from some on both sides that each country is willing to wait for a new counterpart. However, with the LDP’s victory in the elections in December, it is almost certain that these will be the two leaders for the next three years.

Just before Christmas, the U.S. brokered a deal for a trilateral intelligence sharing arrangement with its two allies in Northeast Asia. From the U.S. perspective, the hope was this trilateral agreement would both satisfy some of the current security needs not being met because of a lack of a GSOMNIA agreement between Korea and Japan as well as being an catalyst for Korea and Japan officially signing and completing a bilateral GSOMNIA between themselves.

Constructing Legacies

In his State of the Union address, President Obama acknowledged he had only a short time left as president. These are important times for any U.S. president as they try to shore up a legacy and accomplish goals they have set for themselves and for the country. Often, these years are marked by efforts in foreign policy. In Asia, U.S. presidents in their last years in office have attempted to reach out and engage North Korea. There is some speculation that this could happen again with the Obama administration; however, recent events make that seem unlikely. Moreover, at a time in his presidency where there could be a possible outreach, North Korea once again has undertaken actions that have antagonized the United States, forced the Obama administration to respond in a tough manner, and reduced the likelihood of the Obama administration having the willingness and political capital to engage North Korea in a positive way. North Korea greeted both President Obama’s election and reelection with missile and nuclear tests, and now they began his last two years in office with the cyber attacks on Sony Pictures. While there could be some engagement, the U.S.-North Korea relationship is more likely to remain antagonistic, especially in 2015.

South Korean President Park Geun-hye will also be thinking about her legacy as she enters the third year of her constitutionally mandated one term, five year presidency. The third year is typically when South Korean presidents try to make their legacy moves as they still have time to implement their plans and the next election cycle has not yet begun. This is especially the case for Park Geun-hye. The year has started off with the focus on inter-Korean relations with the hope that something can come of the annual New Year’s statements that offer openings for dialogue between the two Koreas, but the two sides currently appear unable to find common ground. In addition to North Korea, many will be looking to see if Park Geun-hye can make the moves and reforms necessary in the domestic economy to increase growth.

Two Major Moves on Trade

At the APEC summit in Beijing last year, China and South Korea announced the substantial conclusion of the Korea-China FTA. With expectations that the final details on the agreement will be concluded early this year, the implementation of the Korea-China FTA will place South Korea in the unique position of having FTAs with the United States, the European Union, and China – the world’s three largest economic actors.

In addition to South Korea’s FTAs with the United States, the EU, and China, we should expect to see movement on South Korea’s efforts to join the Trans-Pacific Partnership agreement. South Korea announced its interest in joining the agreement being negotiated among Pacific Rim nations in late 2012, but with the increasing prospect of President Obama receiving the Trade Promotion Authority that he needs to conclude the agreement South Korea will likely push to join the talks prior to their conclusion later this year.

A New Nuclear Energy Cooperation Agreement

The U.S.-South Korea 123 Agreement of 1974, or nuclear cooperation agreement, was extended for two years in 2013. The agreement was set to expire in March of 2014 and governs civilian nuclear cooperation between the United States and South Korea. With the agreement set to expire in 2016, the two sides will be looking to conclude a new agreement in 2015.

The major issue in the talks centers around South Korea’s desire to enrich uranium at the front end of the nuclear fuel cycle and to reprocess spent nuclear fuel on the back end. For reasons of non-proliferation, the United States has opposed enrichment and reprocessing provisions in new 123 agreements. With the deadline to extend the current agreement approaching, the two sides will be searching for a way to address the United States’ non-proliferation concerns while also meeting South Korea’s nuclear power ambitions. Some potential outcomes include another short-term extension, long-term agreements that either include or do not include enrichment and reprocessing rights, or an agreement tied to a joint pyroprocessing study to develop a more proliferation resistant reprocessing technology.

The Diversification of South Korea’s Energy Suppliers

While South Korea has trace amounts of fossil fuels, it is dependent on imports of fuel from unstable regions to drive its economy. As of 2012, petroleum and other liquid fuels accounted for 41 percent of South Korea’s primary energy consumption, while natural gas accounted for another 17 percent. More than 85 percent of its petroleum imports came from inside the Strait of Hormuz and more than 50 percent of its liquefied natural gas (LNG) comes from the Middle East as well.

That should begin to change in 2015. In 2014, South Korea put in place incentives for refiners to import oil from regions other than the Middle East to diversify the sources of Korea’s petroleum imports, while the United States issued a notification that exports of condensates, a form of ultra-light crude oil, would be allowed.  The combination of these two changes, along with South Korea’s ability to import LNG from the United States under the KORUS FTA, should help South Korea begin a process of diversifying the sources of its energy imports in 2015.

Samsung’s Future and Its Frenemy Relationship with Apple

After a year in which Samsung lost its smartphone lead in key markets such as China and India, and faced a renewed challenge from Apple which introduced widescreen models to compete with the larger Samsung models, especially the Samsung Galaxy Notes, 2015 will be an important year for the South Korean conglomerate. At the same time, American business news followers likely will be confused by alternating headlines which one week will describe ongoing legal battles between Apple and Samsung regarding intellectual property rights, and which the next week will talk about business cooperation between the two companies, such as Apple’s reported use of Samsung processors in its next generation of iPhones.  So, are the two companies rivals or business partners?

As Samsung seeks to turn around declining smartphone sales that saw its corporate profits drop for the first time since 2011 and navigate a leadership transition to Lee Jae Yong, they will likely be both. We saw a similar situation in the past, in which two other companies came to dominate a market, while appearing to be simultaneously competing and cooperating.  Boeing and Airbus have filed countless trade actions against one another, arguing unfair competitive practices.  Boeing generally focuses on what it considers Airbus’ non-commercial financing arrangements with European governments; while Airbus charges that Boeing has been given an unfair advantage through U.S. government military contracting.

In reality, the relationship between extremely large companies such as Apple and Samsung, and Boeing and Airbus, is complex.  They will fundamentally seek to “out compete” each other while at the same time cooperating when it is in their interest to do so to maintain their market position.  We should expect more of this in 2015.

Feeling the Effects of Social Change in Korea

As South Korea’s population ages, increases in wealth, and becomes more socially tolerant and diverse, the effects of those changes will have noticeable effects, even during the short term of the year 2015.  The increasing percentage of the population born in the two decades following the end of the Korean War (the Korean “baby boom”) will put increasing pressure on the ROK’s health care and pension systems.  It may also lead to a reexamination of Korea’s history during the 1960’s and 70’s.  The demographic shift could even create a market for nostalgia-themed popular entertainment and culture as a counterpoint to K-pop.

The increase in wealth is likely to lead to an increased focus on quality of life, particularly among recent college graduates.  Safety and health issues, including Korea’s high suicide rate, are likely to become bigger political topics.  The trend, discernable among all of the world’s advanced economies, towards an increasing acceptance of diversity, and growing concern for the well-being of minorities, immigrant populations, and refugees, will fuel debate in South Korea about the speed of change, and will put further distance between South Korea and North Korea.  As the 2017 national elections begin to appear on the horizon, 2015 will see political debate regarding whether the right can regain broad, popular support, whether the left can unify around a common platform and leadership, and whether a third political force will emerge.  Social change will create the shifting ground upon which all of these debates will take place in 2015.

Mark Tokola is the Vice President of the Korea Economic Institute, Troy Stangarone is the Senior Director for Congressional Affairs and Trade, and Nicholas Hamisevicz is the Director of Research and Academic Affairs. The views expressed here are the authors’ alone.

 

Image created by Sang Kim of the Korea Economic Institute of America.