Tag Archive | "economics"

As Chinese Tourists Continue to Drop, Korea Turns to the Middle East

By Jenna Gibson

As several KEI analyses have shown, South Korea’s tourism industry  has been one of the main casualties of China’s economic retaliation over deployment of the THAAD missile defense system. New estimates from the Korea Tourism Organization show that China’s retaliation could cost Korea up to 5 million tourists this year, five times as many as when the MERS outbreak significantly dampened tourism in early 2015.

In June 2017, Korea saw a 36 percent drop in tourist entries, due in large part to a 66.4 percent decrease in Chinese visitors compared to June 2016. At that time, Chinese tourists made up 48.8 percent of all entries into Korea – a figure that’s now down to 25.7 percent.

But the numbers also reveal some good news that illuminate an important avenue for future growth in Korea’s tourism industry. While Chinese visitors continued to drop, the number of tourists from the Middle East have jumped significantly, recording a 71 percent increase from June 2016 to June 2017.

And, perhaps more importantly, tourists from the Middle East spend significantly more during their time in Korea than those from other areas, according to a study by the Korea Culture and Tourism Institute. Their recent survey of tourists in Korea showed that Middle Eastern visitors spent an average of $2,593 each during their trip, followed by Chinese tourists at $2,059 each. The average for all visitors to Korea is significantly lower, at $1,625.

In order to cash in on this growing market, the Korean government and the tourism industry are focusing on providing more services for Middle Eastern tourists, including a push to increase the number of halal certified restaurants around the country. Just this month, 117 more restaurants received their halal certification, bringing the total to 252. In addition, many popular tourist attractions have added prayer rooms for their Muslim visitors, including Nami Island, Lotte World, and Coex Mall, as well as Incheon International Airport and Busan’s Gimhae International Airport.

MENA tourism graphic-01

Part of the drive for more tourists from the Middle East choosing to visit Korea is the explosive popularity of Hallyu across the region. Take Iran, for example. There, fascination with Korean culture started back in the mid-2000s, when the historical drama ‘Dae Jang Geum’ was broadcast on state TV and garnered 86 percent ratings nationwide. In a 2017 report of the most popular shows on Netflix around the world, Iran was only one of two non-Asian countries to put a Korean drama (2012’s Love Rain) on the top of their queues.

In June, CJ E&M, Korea’s largest media company, said it will be opening a Turkish unit to increase its presence in Turkey, where locals can’t seem to get enough Korean cultural content. Considering that the filming sites of many popular Korean dramas have become popular tourist destinations, this increase in the popularity of Korean TV shows could lead to overseas fans travelling to Korea to see the spot where their favorite drama couple fell in love.

With the Korean tourism industry continuing to focus on enticing Middle Eastern visitors as well as tourists from all parts of the world, there is certainly an opening to offset some of the losses from the drop in Chinese tourism over the last year or so. But there is still a long way to go – even with the huge increase in visitors, Middle Eastern tourists still only make up around 1 percent of entries into Korea.

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Image from yadem.hayseed’s photostream on flickr Creative Commons.

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Pyongyang’s Deficit Soars: Won Steady But for How Long?

By William Brown

ICBMs are not the only things soaring in North Korean skies.  Comprehensive second quarter data released by China Customs last week shows a huge jump in North Korea’s trade deficit with China—sharply falling North Korean exports and flat imports, a double bad combination.  And, potentially troubling to the Kim regime, the composition of trade seems to be promoting market activity rather than the decrepit, but still enormous, command economy.

China North Korea Trade Balance
*  China stopped reporting crude oil shipments in first quarter 2014 but the trade is reliably said to be continuing, probably at the old aid agreement terms which provides about 150,000 tons of crude each quarter.  The charts, above and below, have added in the value of that volume at generally declining Chinese crude oil export prices–$50 million in the most recent quarter.

Pyongyang has been able to keep a clamp on the exchange rate—won can be traded informally for U.S. dollars in markets around the country—but likely at some cost to the government’s reserves and its ability to expand money supply without sparking inflation, and perhaps with a little help from the balloons. But food and other commodity prices, meanwhile, may be on an upswing as drought followed by flooding diminishes prospects for the critical fall rice crop, and as worries about Chinese supplies may have pushed up gasoline and diesel prices.  An informal inflation index produced by DailyNK has inflation rising to a 16 percent rate in July, suggesting Kim’s signal achievement of fighting inflation may be at risk.

Officially, the Chinese data show a $174 million North Korean deficit in June and $574 million for the quarter, both at record levels. Considering China has taken its crude oil exports “off the books,” the actual North Korean deficit is probably even larger — in the graphics below we have added between $115 to $50 million each quarter to North Korean imports since 2014 to account for the oil.

China North Korea Trade exports and imports

How North Korea finances this large deficit in the face of sanctions on its nuclear and missile activities is not well understood, making policy analysis of those sanctions next to useless. Even South Korea’s Bank of Korea, which bravely estimates North Korean GDP, says it can’t guess at the country’s balance of payments or its hard currency reserves.  But for the sake of argument, and given the trade deficit with China has averaged about $200 million a quarter for the better part of a decade, it would seem reasonable to expect that about this amount of hard currency is earned or borrowed in a combination of net trade with other countries; foreign aid to North Korea including the offset for the crude oil; UN and other international expenditures inside North Korea; small amounts of inward foreign investment and loans; remittances from overseas workers and refugees or Korean immigrant families in Japan, South Korea, China and Russia; and tourism.

  • Probably to re-build domestic confidence after the country experienced a disastrous currency redenomination in 2009, followed by hyperinflation in 2010, Pyongyang’s monetary authorities appear to have fixed the unofficial won’s value at just above 8,000 won per dollar, and began to ignore the official 135 won per dollar rate.  Monetary stability since then is impressive, probably owing to some combination of market price caps, restrictions on the use of foreign currency, conservativism in expanding won credit, direct intervention using the regime’s own reserves and, most interestingly, a willingness to allow legal trading and use of dollars in the market places. And now, with five years of stability, won holders appear satisfied not to chase the dollar.
  • Still, the mystery of the day is why smart money dealers in Pyongyang aren’t taking advantage of the deteriorating export situation by buying up U.S. dollars and forcing a panic.  Either something else is happening that we don’t know about or there is trouble ahead for the country’s always-tenuous finances. One easily can imagine another breakout in favor of the dollar and panic selling of won—hugely disruptive in North Korea’s newly forming half-market economy.

North Korean Won

  

North Korean Exports Labor Intensive and Mining Products

North Korean exports to China fell to only $361 million in the second quarter, the lowest level since 2010, and even this was suppported by generally higher prices for most items.  Major export commodities included:

  • Apparel and other textiles accounted for almost half of its exports—$149 million, up from $145 million in second quarter 2016.
  • Ferrous and non-ferrous ores rose to $78 million, up from $65 million.
  • Fish product exports at $67 million, were up sharply from $31 million.
  • In contrast, mineral products, including coal, was recorded at only $2 million, down from $236 million in the same period of 2016.

None of these items would appear to be big hard currency earners for the regime, although they help provide employment.  Labor intensive textiles exports have grown in recent years as the industry makes better use of its antiquated mills, allowing exporters to pay workers directly in some cases and thus improving productivity of labor and capital alike.  Ore exports would seem problematic, given the UN sanctions against them, but Chinese firms were said to have invested heavily in the huge Musan iron ore complex on the border with China some years ago and may now be recouping investment costs by trucking the ore over into China.  This mine previously served North Korea’s largest industrial complex, the Kimchaek iron and steel mill in Chongjin, which is now dilapidated and only marginally productive. So the iron ore earnings may be coming at the expense of higher value-added steel products once exported from that plant and are likely controversial, even in North Korea, as they are thought of as a giveaway of the nation’s natural resources. China has also invested in a copper mine, and likely in other non-ferrous metals, but results from these are spotty and now largely sanctioned.  Fish products are essentially traded by fishing boats, with flows going both ways depending on the season.

Textiles lead North Korea’s imports

Imports from China also appear to be increasingly driven by consumer rather than government or investment demand.  Textiles, cell phones and television imports are growing at the expense of some industrial inputs and agricultural inputs, and cereals. Petroleum product imports, plus gasoline and diesel fuels, remain sanctioned and low.

  • Textiles and apparel imports reached $258 million, up from $198 million in second quarter 2016.
  • TV and cell phone imports totalled $50 million, up from $38 million.
  • Food products of all kinds registered $123 million, up from $96 million.
  • Diesel, gasoline, and kerosene imports were $19 million, down from $31 million, again from second quarter of 2016.

 

Selected Imports from China

 

Visibility of Chinese-made consumer products among the general public is spreading the suggestion that the economy is doing fairly well—South Korea’s Bank of Korea estimated last week that North Korea’s proxy GDP rose 3.9 percent in 2016, the fastest in well over a decade and this despite the sanctions. But a large question is how far the regime will let this go, given what is clearly a big drain on limited foreign exchange.  Grain imports also rose slightly in the second quarter but remain much lower than in the recent past, and may need to rise much more if the fall harvest turns out to be weak.  Some grain is provided by foreign aid agencies, purchased in China and shipped to North Korea, thus counting as a North Korean import in the trade accounts, but with an offsetting credit in the (unpublished)  transfers account.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.

Illustration by Jenna Gibson, KEI.

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What Do the Trump Administration’s NAFTA Objectives Mean for the KORUS FTA?

By Kyle Ferrier

Last week, the Office of the U.S. Trade Representative (USTR) released its Summary of Objectives for the NAFTA Renegotiation, providing a window into how the administration may pursue updating the U.S.-Korea Free Trade Agreement (KORUS FTA). Because USTR is taking a different approach on the North American Free Trade Agreement (NAFTA) than on KORUS, calling a special Joint Committee meeting under KORUS rules rather than formally triggering the renegotiation process, it is not required to release a similar document outlining negotiation objectives with Korea. Yet, the administration’s regular singling out of both trade deals and characterization of each set of new talks suggests USTR may have similar objectives on both. What then does the summary of objectives for NAFTA portend for KORUS?

The biggest takeaway is that the proposed changes are not as extensive as the administration’s rhetoric on trade would suggest. Although Donald Trump lambasted the Trans-Pacific Partnership (TPP) on the campaign trail and withdrew the U.S. from the deal on his third day in office, most of what USTR is looking to include in an updated NAFTA is either drawn directly from the TPP or generally congruent with the agreement. As such, Seoul should view renewed talks as an opportunity to update KORUS.

Apart from newer amendments on automobiles and beef, KORUS is 10 years old. Some chapters may be in more need of an update than others, particularly e-commerce, though both countries could benefit from revisiting all chapters to reflect more advanced rules. Mexico and Canada essentially went through this process with the U.S. for the TPP negotiations and will have to run the gamut again through the much older NAFTA, turning 23 this year. While Korea may not have been party to the TPP, in many ways KORUS was the foundation for the TPP and it has long been an observer of the deal. Seoul is well-acquainted with TPP rules and the domestic adjustments required to meet their stipulations, which should greatly facilitate discussions on KORUS.

In addition to upgrading the existing chapters, renewed talks could bring new chapters from the TPP to KORUS. The USTR document on NAFTA has separate sections on state-owned and controlled enterprises (SOEs), small- and medium-sized enterprises (SMEs), and good regulatory practices, all of which appeared as individual chapters for the first time in an FTA in the TPP. All three have potential benefits for the Korean economy, especially the SME chapter which seeks to make exporting easier for small companies, a perennial government priority. However, a currency chapter as suggested in the USTR document could be a sticking point.

Although the possible inclusion of currency manipulation provisions may be of concern to Seoul, the Trump administration is not likely to entirely give up on the issue. Addressing Washington’s concerns bilaterally through KORUS may even be a more acceptable venue. Korea is on the U.S. Treasury’s Monitoring List for currency manipulation, meeting two of the three thresholds of a manipulator. Trump’s threats to name China a currency manipulator earlier this year raised concerns that Treasury would alter its criteria, possibly naming Korea a manipulator in the process. Yet in its April report, Treasury largely followed the same methodology as was in previous reports and did not name any manipulators. Nevertheless, there is no guarantee that the next report due out in October would maintain the same criteria, particularly as Trump publicly tied not naming China a manipulator to its help with North Korea, which he seemingly no longer views as a viable policy option.

The USTR objective on currency in the NAFTA document does not offer any specifics, only suggesting that exchange rate manipulation would be avoided “through an appropriate mechanism.” However, if this section were to also follow the precedent set by TPP, USTR will likely ask Seoul to be more transparent in its official currency market interventions, an issue that has been repeatedly raised in Treasury’s international currency reports to Congress. In a 2015 Joint Declaration, TPP countries committed to avoiding currency manipulation as well as publicly reporting their foreign-exchange interventions. As public reporting of foreign-exchange interventions relates to the only Treasury criteria that Korea does not meet (i.e. repeated net purchases of foreign currency more than 2 percent of GDP over the previous 12 months), it may be in Korea’s best interest to be more transparent regardless of this issue arising in trade talks with the United States. Additionally, through KORUS talks, addressing currency manipulation and other contentious issues that might have made Korea hesitant to join the TPP could even help facilitate its accession to the agreement, for which there are convincing arguments.

Although USTR’s objectives for NAFTA largely suggest that the Joint Committee meeting will be used as an opportunity to update KORUS based on free trade principles, Korea should be cautious as well.  Of high concern for Canada and Mexico is USTR’s objective to eliminate the Chapter 19 dispute settlement mechanism for trade remedies as well as eliminate the global safeguard exclusion for NAFTA countries outlined in Article 802. This would make it easier for the U.S. to apply more anti-dumping and countervailing duty measures against both countries and simultaneously more difficult for them to contest these measures. While there is no global safeguard exclusion in KORUS (Article 10.5 says imports “may” be excluded rather than “shall” in Article 802) nor does it go as far as NAFTA on dispute settlement (Article 10.7 does not create binational panels to resolve disputes as does Chapter 19), some are worried these specific objectives are how the Trump administration plans to advance protectionism. Others also expressed concern over the first objective, which states “Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries,” as a possible avenue to implement managed trade rather than free trade.

Though it is too early to definitively gauge how Joint Committee talks will proceed, there is reason enough for Korea to be cautiously optimistic about U.S. negotiating goals. Yet, Seoul would be wise to closely follow the NAFTA renegotiation, giving special attention to areas with the potential to promote protectionism and managed trade.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Image from Michael Vadon’s photostream on flickr Creative Commons.

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Since Trump’s Election, the U.S.-Korea Trade Deficit Has Been Reduced by One-Third

By Phil Eskeland 

Last March, President Donald Trump directed the Department of Commerce and the Office of the U.S. Trade Representative (USTR) to prepare an Omnibus Report on Significant Trade Deficits within 90 days.  South Korea has been identified as a country that would be included in this report based on 2016 data that shows U.S. goods exports to Korea declined and the trade deficit has grown since the implementation of the Korea-U.S. Free Trade Agreement (KORUS FTA).  While awaiting completion of the report, USTR also issued a letter to Korea asking for a special meeting of the Joint Committee to discuss possible amendments and modifications to the KORUS FTA to address the “significant trade imbalance” between the U.S. and the Republic of Korea.   However, both efforts use outdated statistics with respect to the latest data in the U.S.-Korea trade relationship.

Since President Trump was elected in November, the monthly bilateral merchandise trade imbalance between the U.S. and South Korea has been less that the previous year.  Thus, the six month (December through May) cumulative goods deficit has been cut by more than one-third (or 34 percent) as compared to same six-month time period from the previous year.  One reason for this reduction is that for the months of December, March, April, and May, the U.S. has hit repeated record levels of merchandise exports to Korea – $4.27 billion in December, $4.36 billion in March, $4.43 billion in April, and $4.5 billion in May.  While trade statistics are not available from the U.S. government yet for the month of June, the Korea International Trade Association (KITA) reported that South Korea imported a record $4.8 billion in goods from the United States in June, resulting in yet another month in which the bilateral merchandise trade deficit was significantly less than last year’s level.

Trade Data 7.2017-02

This trend is even more pronounced when you include services trade.   Comparing the combined trade imbalance statistic of the 4th Quarter 2015 and 1st Quarter 2016 with the 4th Quarter 2016 and 1st Quarter 2017[1] (in other words, since Trump’s nomination for president), the trade deficit in both goods and services between the U.S. and the ROK dropped by 37 percent.

Trade Data 7.2017-01

This updated information should be incorporated in any analysis of the bilateral trade deficit and as part of any administration strategy to reduce the trade imbalance between the U.S. and South Korea.  It appears that the free market and the KORUS FTA is already working to accomplish the Trump Administration’s goal with respect to lowering the trade deficit between the two countries.

[1] 2nd Quarter 2017 data on trade in services will not be made available until early September.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.
Image from Tom Driggers’ photostream on flickr Creative Commons.      

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What Does the Call for a KORUS FTA Special Meeting Mean for Korea?

By Phil Eskeland

On July 12, 2017, Ambassador Robert Lighthizer of the Office of the U.S. Trade Representative (USTR) sent a letter to Minister Joo Huynghwan of the Ministry of Trade, Industry and Energy of the Republic of Korea (ROK) requesting the convening of a special session of the Joint Committee as provided for in the Korea-U.S. Free Trade Agreement (KORUS FTA) to discuss possible revisions to the agreement.  Specifically, the letter conveys the desire on behalf of the Trump Administration to “review progress on the implementation of the Agreement, resolve several problems regarding market access in Korea for U.S. exports, and, most importantly, address our significant trade imbalance.”

First, it is important to note that this request is a far cry from threats to terminate the KORUS FTA.  Nonetheless, this action should not be unexpected in light of past campaign rhetoric by President Donald Trump, but represents a prospect to possibly make amendments and modifications to the base text of the agreement.

This meeting can be an opportunity for both South Korea and the United States to update and modernize this 10-year old agreement.  There have been many changes in the global economy since KORUS FTA negotiations concluded in 2007, particularly in the field of digital trade.  Korea could offer specific changes to policies that have hindered full and open access to U.S. exporters, such as recognition of U.S. automobile safety standards.  On the flip-side, Korea should not be reticent in asking for changes in U.S. policies that have hampered Korean exports to the United States.

However, it is disappointing to see the use of just one set of trade statistics by the Trump Administration without incorporating other factors, such as trade in services data that continues to produce record surpluses for the U.S., that form a more complete and accurate economic picture as it relates to Korea.  The merchandise trade deficit issue serves as an unfortunate scapegoat for economic stagnation in many parts of the United States that has other causes.

Nevertheless, when examining the totality of trade between the U.S. and Korea in both goods and services, the KORUS FTA has been a success because:

  1. Total U.S. exports to Korea grew (not declined) by $2 billion between 2011 and 2016; and
  2. The total U.S. trade deficit in goods and services with Korea is ranked well below other nations, including Italy (see chart below).  Far from being a significant contributor to America’s trade imbalance, Korea’s portion is only 2.9 percent of the total U.S. trade deficit with countries of the world that export more to the U.S. than they import from us.

2017 KORUS Pie Chart

In addition, the independent U.S. International Trade Commission (USITC) concluded last year that the KORUS FTA improved the U.S.-Korea merchandise trade imbalance in America’s favor by $15.8 billion.  In other words, the bilateral trade imbalance between the U.S. and Korea would have been much higher absent the KORUS FTA because U.S. exports of items that were covered by the agreement have dramatically increased since implementation.  Just ask the U.S. agricultural community about the growth of U.S. exports of beef, cherries, blueberries, lobsters, almonds, and a host of other American agrarian products to Korea regarding the positive impact of the KORUS FTA.  Many of these rural farming and ranching communities are located in counties and states that voted for Donald Trump.

In fact, the most recent trade statistics from the U.S. Department of Commerce continue to show the U.S. exporting a record level of goods across-the-board to Korea since the beginning of the year.  During May, 2017, (the latest data available), the U.S. sold nearly $4.5 billion worth of goods to Korea – the highest monthly level in the history of U.S.-Korea trade relations.  This has helped to produce a 33 percent reduction in the bilateral trade imbalance thus far this year, in comparison to 2016 levels, continuing a declining trend in the U.S.-Korea trade deficit that started mid-last year, well before the U.S. presidential election.

In short, the free market and the KORUS FTA is working on its own accord to resolve the Trump Administration’s concern about the merchandise trade imbalance with Korea.   If present trends continue, the U.S. may experience a lower bilateral merchandise trade deficit with Korea in 2017 than we have seen for the past several years – all without any action by USTR.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.

Photo from National Ocean Service’s photostream on flickr Creative Commons.      

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One Small (and Medium) Step for Korea’s Economy

By Nathaniel Curran

The future of Korea’s economy may depend on SMEs (Small and Medium sized Enterprises) just as much as it does on the large traditional companies, the chaebol.

The Moon administration has already announced plans to boost support for SMEs, and while the success of the initiative remains to be seen, it raises important questions about the future of Korea’s economy.

Korea’s economy today is almost synonymous with the chaebol, the enormous, family owned and vertically integrated conglomerates that possess large market share in major global industries like shipping, electronics, and automobiles. In 2015, sales revenue from the five largest chaebol accounted for almost 60% of Korea’s GDP. Samsung and its subsidiaries alone account for roughly 20% of Korea’s economy.

It’s easy to understand the public and media fascination with the chaebol; they have been hailed as an important driver in South Korea’s rapid economic development, known as the “Miracle on the Han.” The seemingly symbiotic relationship between the chaebol and the government has been hailed as both dirigisme par excellence, and as crony capitalism. But regardless of one’s opinion of the chaebol, it’s undeniable that from their humble beginnings under Japanese colonial rule, the chaebol have shown remarkable resilience as the world has changed around them.

Perhaps the greatest threat to the chaebol’s survival came in 1997 during the Asian Financial crisis, during which 97% of chaebol went into bankruptcy. Despite the blame they attracted for causing the crisis, the chaebol emerged from the 1997 crisis largely unscathed. Although the subsequent IMF bailout led to significant restructuring, the chaebols’ modus operandi of family control, high debt ratio, and opaque operating structure remained largely intact. In fact, the chaebol were able to take advantage of IMF mandated restructuring to fire approximately 40% of their employees, who could then be rehired as part-time employees.

In the shadow of the Chaebol

However, the Western media’s focus on the power of the chaebol has served to obfuscate another important facet of Korea’s economy/economic development: SME’s (Small and Medium-sized Enterprises). While the chaebol have captured the lion’s share of attention -and treasure- in Korea, SMEs played, and continue to play, a vital role in Korea’s economic narrative.

Korea today boasts 3 million micro-enterprises (businesses that have fewer than 10 employees). Furthermore, SMEs account for roughly 37% of exports, which is especially impressive when one considers that fact that Samsung alone accounts for a whopping 30% of exports. Furthermore, employment continues to rise at SMEs, all the while accompanied by a growing popular sentiment that the interests of the Korean people are not being well served by the chaebol’s business activities.

The future of SMEs

SMEs may have found a champion in President Moon, who has repeatedly pledged to help spur entrepreneurship.  In this vein, the administration has already created a ministry for SMEs and startups. This is a promising sign, as the best way to deal with the chaebols’ stranglehold on the Korean economy might be less to attempt to reign them in than to directly support SMEs. After all, attempts to impose restraints on the chaebol have repeatedly failed, and despite Korea’s overreliance on exports, the chaebol likely will remain vital to a healthy Korean economy well into the future.

It in the present, it seems unlikely that Korea will be able to completely emulate Germany’s mittelstand (Germany’s innovative, tight-knit, and highly focused SMEs that play a leading role in the economy). That being said, diversification away from the chaebol would still be useful. For decades the chaebol enjoyed privileges and government support that make it difficult for SMEs to compete in today’s neoliberal environment of unregulated markets. Putting investment into SMEs would help spur innovation and much needed domestic competition. There is certainly widespread support for such measures, as the chaebols’ interests seem decreasingly to parallel state economic and social objectives.

It won’t be easy to steer Korea away from over-dependence on the chaebol, especially when the idea of working at a chaebol has become such a deeply ingrained dream for most young Koreans. Wages at the chaebol continue to outpace their SME counterparts. There are promising signs, however: not just the Moon administration’s investment plans, but also a burgeoning startup scene that may succeed in attracting more young talent away from traditional salary-man jobs at chaebol firms.

An SME revolution could be just what Korea needs to maintain its competitive edge in the global marketplace in the coming decades.

Nathaniel Curran is a PhD student at USC’s Annenberg School of Communication and a 2017 COMPASS Summer Fellow. The views expressed here are the author’s alone.

Photo from Yeseul Ko’s photostream on flickr Creative Commons.

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Overcaffeinated? Korea’s Ubiquitous Coffee Shop Culture

By Nathaniel Curran

One thing that shocks most first time visitors to Korea is the ubiquity of coffee shops. You can’t find anywhere in Seoul that isn’t a short walk to the nearest café. The sheer magnitude of Korea’s passion for coffee is best expressed through numbers: Korea boasts the highest per capita number of cafes in the world. The result being there are an estimated 80,000 cafes in a country slightly smaller than Kentucky. While that number is staggering, the growth of the café industry is even more mind-boggling; back in 2011, Korea boasted only a measly 12,400 cafes. Even if one goes with a more conservative estimate in 2015 that put the number of cafes at around 50,000, the industry has undeniably grown by a factor of least five in the last decade.

While not as uniquely Korean as the noraebang (karaoke rooms) that seem to stud most streets in Korea, coffee culture permeates every neighborhood in Seoul, with tiny boutique cafes competing alongside behemoth Korean chains like Ediya Coffee, which as of last year boasted 1,800 stores.

Far from home, close to coffee

If you ever find yourself off the beaten path, perhaps on a deserted highway, be assured coffee will not be difficult to procure; convenience stores and rest-stops across carry dozens of varieties of pre-bottled coffee. These include heated cans of coffee as well as many varieties of refrigerated specialty coffees, such as white chocolate mochas and caramel macchiatos.

In addition, instant coffee is easy to come by in Korea. Sugary, delicious, and distributed in single-serving tubes that can also double as impromptu stirring sticks, they require only the addition of hot water. Even though consumption of instant coffee has declined in recent years, it was still an almost $900 million industry as of 2015. However, most Korean cafes would be loath to be considered in the same breath as instant coffee. Specialty coffee shops in Korea often charge more than 10,000won ($8) for their drinks, which advertise beans sourced from far flung locales and that are carefully curated by hagwon certified baristas.

From Gojong to Gangnam

Coffee came to Korea in the late 19th century, and Korea’s last monarch, Gojong, was a coffee fan, and the backer of Korea’s first coffee shop. Despite that initial foray into java, the modern Korean coffee habit owes its origins to the instant coffee powder that was common in American military bases during and after the Korean War. Instant coffee dominated the market for years, until, with the advent of Starbucks in Korea in the late 1990s, the Korean public was introduced to the joys of espresso. Now, espresso dominates the café market, with the singular “Americano” becoming Korea’s drink of choice.

Sadly, Korea’s more traditional beverage, tea, has not fared well against the onslaught of cafe-ization; the tea market has been cut in half since the late 2000s, while coffee sales climbed an incredible 1,598 percent.

The future of coffee in Korea

Experts have repeatedly predicted that Korea’s coffee market has reached saturation and that the glory days of café culture is coming to an end, only to be proven wrong. In fact, the intense competition in the café market has only given rise to more variations on the traditional coffee shop, including sleep cafes and exotic animal cafes that feature civet cats and wallabies.

While it’s hard to imagine that Koreans will drink even more coffee in the future, or that any possible ideas for cafes have not yet been exhausted, I’m confident that Korea will surprise us yet. In the meantime, Koreans can rest on the laurels of their vibrant coffee industry. Although Korea often gets called out for its overreliance on exports, what greater proof is there of a developed domestic economy than a country with a $5.7 billion dollar coffee market?

Whatever the future of cafes and coffee in Korea, the last two decades have been a heyday for Italian espresso machine makers, who are undoubtedly toasting a new sort of “Miracle” (or perhaps, “Americano?”) on the Han.

Nathaniel Curran is a PhD student at USC’s Annenberg School of Communication and a 2017 COMPASS Summer Fellow. The views expressed here are the author’s alone.

Photo from Dorothy’s photostream on flickr Creative Commons.

 

 

 

 

 

 

 

 

 

 

 

 

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Hallyu Sets its Sights on the Middle East

By Jenna Gibson

At the end of May, Korea’s largest media company announced it would be opening a Turkish unit to help create and promote local content for the Turkish market. They already have plans to film Turkish versions of popular Korean movies, and hope to move forward with more Korean-Turkish co-productions in the future.

CJ E&M is a Hallyu powerhouse, owning the music-oriented TV channel Mnet as well as popular cable channel tvN, responsible for several smash-hit dramas including 2016’s “Goblin.” With this move to increase its presence in Turkey, CJ is hoping to make new inroads for the Korean Wave in the Middle East.

Although the main markets for Korean pop culture abroad are still in East and Southeast Asia, the phenomenon has put down roots around the world, including in the Middle East. In Iran, for example, fascination with Korean culture started back in the mid-2000s, when the historical drama “Dae Jang Geum” was broadcast on state TV and garnered 86 percent ratings nationwide. In fact, in a 2017 report of the most popular shows on Netflix around the world, Iran was only one of two non-Asian countries to put a Korean drama (2012’s Love Rain) on the top of their queues.

Meanwhile, last year the United Arab Emirates became the first non-Asian country to host a KCON event after the United States. KCON, a music festival/cultural experience featuring some of the biggest k-pop stars as well as demonstrations of Korean food, beauty products, and more, drew more than 8,000 fans to its Abu Dhabi stop.

Scholars have speculated that one of the reasons Hallyu is so popular in the Middle East is because although some of the specifics are different, Korean dramas tend to focus on values that conservative audiences in the Middle East find relatable. According to one study of female fans of Korean pop culture in Iran, “Reflecting traditional family values, Korean culture is deemed ‘a filter for Western values’ in Iran.” The study dug further into online fan communities across the Middle East, showing that love of Korean pop culture allowed women to share a sense of community with fellow Hallyu fans. “The uni-culture cyberspace community of fandom has given Middle Eastern women confidence and a strong sense of group identity, sometimes for the first time.”

But the Hallyu movement is not just about giving fans a place to enjoy catchy dances or dramatic love stories. For the Korean companies that create Hallyu content and sponsor overseas events like KCON, it’s about getting fans to buy Korean.

“We see that there are a lot of business potential in many areas that are influenced by Korean culture, such as the beauty, IT and SOC markets,” Sul-joon Ahn, President of Music Division at CJ E&M, told Dubai News after the KCON event.

In fact, South Korea has been trying to create a “Second Middle East Boom,” focused on boosting industries like construction, infrastructure and energy. By capitalizing on the popularity of Hallyu, this push for increased Korean presence in the region can expand to include consumer goods and creative content.

CJ E&M’s expansion into the Turkish market could signal a new era of Hallyu, one that focuses on localization and domestic buy-in to boost the continued success of Korean pop culture around the world.

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Image from Republic of Korea’s photostream on flickr Creative Commons.

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Just How Dependent is South Korea on Trade with China?

By Kyle Ferrier

China’s punitive economic measures against South Korea over THAAD may have shrouded Beijing-Seoul relations in uncertainty, yet they highlight Korea’s economic dependence on China. Throughout the extensive media coverage of impacted Korean companies as well as the regional geopolitical implications, particularly as they relate to the North Korean problem, is a common thread of economists suggesting Korea is too dependent on China for growth. While this is hardly a new development, recent events seem to be reinvigorating scrutiny of the size of bilateral ties. But, in the context of other global relationships how does this one stack up?

The Korean economy is reliant on trade for about half of its growth, making each large external relationship of crucial importance. Of the nearly $500 billion goods exported to the world last year, around $125 billion were sent to China, or a quarter of all exports, placing China at the top of Korea’s list of export destinations. Though both trade as a portion of GDP and the percentage of total exports sent to the top export destination are high, it is not a unique phenomenon, as shown in the Chart 1. In terms of GDP, Korea is the eleventh largest economy in the world. Among its peers in the top sixteen largest economies it is only just slightly behind Germany in terms of total exports as a portion of GDP. Korea’s exports to China as percentage of its total merchandise exports in 2016 is behind Australia’s 31.6 percent, but this pales in comparison to Canada and Mexico’s exports to the U.S., 76 and 81 percent of exports, respectively.

Merchandise Trade

Chart 2 provides a complementary perspective. It measures variance in the share of total exports between the top two export partners and among the top five partners for a subset of countries from Chart 1. Or, in other words, it illustrates how spread out exports are. The first bar is reflective of the spread of exports to the top five export partners. The lower the bar, the less of a difference in the share of total exports between each partner, or the more equally distributed exports are. The second bar reflects the difference between the first and second ranked export destinations. The higher the bar, the bigger the drop-off between the share of total exports. This is also suggestive of the extent to which the first bar is driven by the top export market.

Chart 2 reveals exports for major European economies are more equally spread out than in major Asian economies, with the exception of Indonesia. It also reveals that within this group of Asian economies, Korea and Australia stand out for their dependence on exports to China. Although Japan may also have a more unequal degree of export concentration within its top five markets, the cause for this is divided between the U.S. (20.2 percent) and China (17.6 percent).

Variance Graphic

Yet more is revealed on how the Korea-China trade relationship compares to others if the charts are observed together. Korea and Australia may both heavily rely on trade with China, but Korea is nearly twice as dependent on exports for growth as Australia. While Germany is the closest to Korea in terms of exports as a percentage of GDP, exports are much more equally distributed among its top five trading partners. However, clearly absent from Chart 2 are Canada and Mexico, the inclusion of which would have dwarfed the differences between the selected Asian and European states due to their outsized trade ties with the U.S.

In essence, characterizing the magnitude of Korea’s trade dependence with China in a global context really depends on how it is framed. Compared to other large economies in Asia it is high, and to European countries very high, but in relation to North America is it is practically negligible.

Though the size of the relationship is important, so also is the composition of trade, especially considering why Korea-China economic ties are again garnering attention. Around three quarters of South Korean exports to China is processing trade, meaning goods are sent to China only to be assembled and then exported to a third country who is the ultimate driver of demand for these Korean exports to China. Australian exports to China on the other hand are driven by raw materials (i.e. HS codes 26, 27, and 71), composing nearly three quarters of all exports to China and are directly tied to domestic Chinese demand. During the past several months when Beijing has seen to be punishing South Korea over THAAD, Korean exports to China have increased, rising 10.2 percent year-on-year in April and 12.1 percent in March. While there is obviously still room for China to hurt the Korean economy, the fact that most Korean exports to China are tied to global demand limits the extent to which Beijing may influence economic ties on political grounds.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Photo from SeoulHappyLife’s photostream on flickr Creative Commons.

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Is the Hallyu Crisis with China Over?

By Jenna Gibson

Beijing has approved the broadcast of a new Korean drama that had been co-produced by a Korean and a Chinese company, according to a source in the Chinese entertainment industry, making it the first Korean show to get the green light since before the THAAD spat.

This move is good news for Korean entertainment companies, which have been lamenting the Chinese ban which had slowly pushed Korean stars out of the spotlight throughout last year and culminated in direct retaliation against tourist packages and Lotte Department stores. It also bodes well for drama co-productions, which had seen tremendous success in last year’s standout Descendants of the Sun. At the time, before THAAD derailed things, Korean-Chinese collaboration was seen as the new frontier in Hallyu, and key to the continued success of Korean creative content in the Chinese market.

What’s interesting is the impetus for China’s reversal on allowing Hallyu content. Beijing is likely trying to start off on a good foot with newly elected Korean President Moon Jae-In, himself a skeptic of the THAAD system, in an attempt to give Moon some leeway should he decide to review the deployment.

A recent op-ed in the People’s Daily-affiliated Global Times insisted that “It is likely that Moon will stop THAAD’s deployment,” saying, “The huge economic losses South Korea has suffered are a result of the Chinese public’s anger. South Korea, which relies heavily on China economically, needs to weigh its potential gains and losses carefully” and that “Both Beijing and Seoul should take Moon’s presidency as an opportunity to promote warmer bilateral relations.”

But in reality, Moon has little room to maneuver at this point. THAAD is already in place and operating at some capacity, and recent missile launches from North Korea (the second of which was detected by THAAD) have highlighted its necessity in the public eye.

Although there was a dip in approval last November, the Korean public has largely remained favorable toward the THAAD system, according to polling by the Asan Institute in Seoul.  As of March, 50.6 percent of Koreans approved of THAAD, with 37.9 percent opposed. Perhaps because of this, President Moon has softened his position from outright opposition during the early stages of the campaign to stating that he objects to the way the decision was made, not the system itself.

As Asan Vice President Choi Kang pointed out in a KEI podcast after the election, President Moon may be constrained both by domestic politics and public opinion. Moon’s Minjoo Party only has 120 seats out of 300 seats in the National Assembly, and he failed to breach 50 percent of the vote during his election.

“How he can make a coalition or compromise with opposition parties is going to be a very, very critical issue for him to handle in the early phase of his presidency,” Choi said.

This could be particularly difficult when it comes to China, which has seen a steep decline in popularity among the Korean public since they stepped up their economic pressure over THAAD. Beijing’s economic retaliation has included the ban on selling tourist packages to Korea as well as cancelled concerts and a block on Korean entertainment content being uploaded to streaming sites.

According to a new report from the Korea Institute for Industrial Economics and Trade (KIET), “China’s ban on South Korean cultural imports will amount to 5.6 trillion won (US$5.02 billion) and 15.2 trillion won (US$13.6 billion) in direct and indirect damage in the consumer goods distribution sector” if it continues for six months. New numbers from the Korea Tourism Organization show a 66 percent year-on-year drop in Chinese visitors in April, driving much of the estimated losses for industries such as clothing and cosmetics.

“It’s quite difficult for South Korea to improve its relations with China because public understanding of China has deteriorated over several months,” Choi said. “So unless there is a positive sign coming from China on this economic pressure, it is very unlikely for the South Korean government to improve drastically its relations with China.”

Now that China seems to be offering an olive branch, public opinion may begin to shift back in Beijing’s favor. But after months of panicked headlines over China’s latest crackdown, it’s unlikely that one fantasy romance drama will be enough to turn things around entirely.

At this point, Beijing may continue to roll back its content and tourism bans in the hopes of wooing President Moon to their point of view, or as a face-saving measure. Either way, though, Chinese leadership would be ill-advised to hold their breath for a THAAD removal.

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Image from LG전자’s photostream on flickr Creative Commons.

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About The Peninsula

The Peninsula blog is a project of the Korea Economic Institute. It is designed to provide a wide ranging forum for discussion of the foreign policy, economic, and social issues that impact the Korean peninsula. The views expressed on The Peninsula are those of the authors alone, and should not be taken to represent the views of either the editors or the Korea Economic Institute. For questions, comments, or to submit a post to The Peninsula, please contact us at ts@keia.org.