Tag Archive | "South Korea"

Borkers at the São Paulo Stock Exchange (Bovespa).

Provoking the Market: Investors More Worried about Washington’s Response than Pyongyang’s Provocations

By Kyle Ferrier

Analysts have attributed recent market downturns to North Korean provocations, but investors seem to be reacting more negatively to responses from the Trump administration.

Prior to North Korea’s sixth nuclear test on Sunday, Kim Jong-un was cited as a key contributor to recent developments in global markets. The fall in the value of the dollar and the strengthening of the euro and gold this summer have at least been somewhat linked to North Korean provocations. For the dollar and the euro, North Korea is at most exacerbating these trends, not causing them. Since the end of last year, the dollar has been in general decline and the value of the euro has steadily grown. This is primarily driven by looser monetary and fiscal policy in Europe as the Federal Reserve plans to unwind its balance sheet and the White House faces hurdles in its tax reform and infrastructure initiatives. It is harder, however, to argue Pyongyang has played an equally minor role in higher gold prices. Yet, movements in the price of gold and South Korea’s KOSPI stock index this year suggests investors are more concerned with uncertainty stemming from the Trump administration’s approach to North Korea.

Graph of the price of gold, March to September 2017

Graph of the price of gold, March to September 2017

The conventional wisdom has been that the financial impact of North Korean provocations in South Korea decreases over time. My analysis of North Korea’s nuclear tests, long-range rocket launches, and military provocations along the DMZ through February 2016 (after its second “satellite launch” attempt) found this line of thinking applied to nuclear tests, but could not fully explain the other two categories. It is more accurate to state that the impact of North Korean provocations on markets in Seoul depends on whether a given event is viewed to be outside the context of normal geopolitical developments. That the financial impact of North Korean provocations generally diminished merely illustrated investors had been through similar events and their bottom line was minimally affected. It was not necessarily an indicator of future reactions, particularly as circumstances surrounding each provocation can change dramatically.

KOSPI stock index, March to September 2017

KOSPI stock index, March to September 2017

Significant drops in the KOSPI corresponding with North Korean provocations in January and February last year raised concerns that markets were reacting to Pyongyang at levels not seen since the shelling of Yeonpyeong island in 2010, but these can be chalked up to coincidence rather than cause. These concerns were renewed later last year in the aftermath of North Korea’s fifth nuclear test on September 9. Many news outlets linked the 1.25 percent drop in the KOSPI that day to the test, but this was also coincidence and not cause. Of the 1.25 percent drop, only around 0.07 percent occurred after news first broke of the nuclear test at 9:45am. The fall in the KOSPI as well as the won was much more likely linked to Samsung’s Galaxy Note 7 woes as well as a slowdown in global markets. Thus, from 2010 through the end of 2016, North Korean provocations had a negligible impact on markets in Seoul.

The KOSPI’s reaction to the North’s latest nuclear test is the clearest indication that this trend has ended in 2017. On September 4, the first trading day after the test, the KOSPI opened 1.73 percent lower. Though some of these losses were gained back, it was down 1.19 percent by the end of trading. Unlike the previous test last year, the sixth nuclear test is most likely to blame for this drop. The only other instance of a notable drop in the KOSPI caused by a provocation was in response to the July 4 ICBM, though its impact was minimal: The KOSPI closed 0.58 percent lower that day and took five days to recover. The ICBM launch on July 28 saw almost no change in the KOSPI or the value of the won. And, the August 29 ballistic missile that flew over Japan was only met with a 0.23 drop, which was made back the next day.

Timeline of North Korea's rocket launches and their impact on the South Korean KOSPI stock index

Timeline of North Korea’s rocket launches and their impact on the South Korean KOSPI stock index.

That markets would react to the earlier ICBM launch and the nuclear test makes a degree of sense, considering that both added a new component of geopolitical risk on the Korean Peninsula. The July 4 missile launch was the first time Pyongyang demonstrated its capability of hitting a U.S. state and the nuclear test also possibly revealed its ability to miniaturize a nuclear weapon.

However, from stronger market responses to the Trump administration’s approach towards Kim Jong-un, it is highly likely that Washington is playing a greater role in the negative market reactions to Pyongyang this year. From April 4 to 11, the height of confusion over the whereabouts of the USS Carl Vinson, the KOSPI fell six straight days, totaling to a 2 percent loss. From August 8 to 11, after Trump’s “fire and fury” comments, it fell four consecutive days, amounting to more than a 3 percent loss. “Fire and fury” was also a retort to the July 28 ICBM launch, which ironically had no discernible financial impact in Seoul.

Table of North Korea's nuclear tests and their impact on South Korea's KOSPI stock index

Table of North Korea’s nuclear tests and their impact on South Korea’s KOSPI stock index.

Both incidents also had a bigger impact on the price of gold than did North Korean provocations.  Between April 3 to 13 the price of gold shot up 2.75 percent. It rose again by 2.5 percent from August 8 to 11. Market responses to the provocations in July were mere blips by comparison. Gold rose a quarter percent on July 4, but was back to its previous price within two days, and the price actually fell after the subsequent ICBM launch. Though the August 29 and September 3 provocations were met with steep price increases – 2 percent and 0.68 percent, respectively – these reactions seem to be heavily influenced by Trump’s “fire and fury” comments, evidenced by the current increase in gold prices starting around the time of his remarks.

While harder to judge from the KOPSI alone, the comparison with gold prices implies that this week’s drop in the KOSPI was a product of market nervousness about how the U.S. might reply to the test, not North Korea. Further, if geopolitical concerns did play a role in the KOSPI in early July, they were likely caused by anxieties about a U.S. response, fueled by the USS Carl Vinson incident and Trump’s “disruptive” foreign policy.

Although these reactions are relatively minor and fleeting in the grand scheme of markets, they provide a window into how investors view geopolitical developments on the Korean Peninsula. They may only reflect temporary sentiments, but present the strongest case there has been in recent years that Washington is perceived as the primary driver of risk on the peninsula, not Pyongyang.

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 the Rafael Matsunaga’s photostream on flickr Creative Commons.

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Korea Unveils Ambitious Plans for “Mooncare”

By Jenna Gibson

While the United States is locked in a fierce debate over Obamacare, South Korea is going through its own deliberations about healthcare reform. On August 9, right before hitting his 100th day in office, Korean President Moon Jae-In unveiled his plan to expand Korea’s already extensive healthcare system, a proposal quickly dubbed “Mooncare.”

Korea currently provides universal healthcare through its National Health Insurance Service. All citizens are required to pay into the fund via taxes, and they are all covered for general medical costs. Private insurance does exist, and people usually purchase those additional policies to cover large medical expenses, such as a major accident or cancer treatment.

One of President Moon Jae-In’s major pledges has been to reform this system, with the particular goal of decreasing costs for low-income patients. Moon’s plan focuses on three major changes: first, he wants to expand the types of procedures covered by the state insurance to eventually encompass all medical treatment except purely optional operations such as non-medically indicated cosmetic surgery. In addition, he plans to lower the cap for out-of-pocket expenses so that low-income Koreans would only have to pay up to 1 million won ($883) per year for their medical care. Finally, he plans to increase emergency financial support for those in the lower half of the income bracket, providing them access to up to 20 million won ($17,663) in case of a major health crisis.

“We will continue to move toward building a fair and just Republic of Korea that will ache when the people ache and will only smile when the people smile,” Moon said at the plan’s unveiling. “We will build a country where every person is free of concern over medical costs and can receive treatment for any disorder without having to worry about expenses.”

However, not everyone is enthusiastic about these sweeping changes. Korea will need 122,164 more nurses, 1,613 pharmacists, and 785 doctors to implement the president’s plan, according to a report from the Ministry of Health and Welfare. And critics have balked at the 30.6 trillion won ($26.9 billion) pricetag for the plan, saying that even if the government covers the increase for now, those costs may eventually be passed back down to taxpayers. This plan fits in with accusations that Moon is becoming a “Santa Claus President” – along with this healthcare plan, Moon has already promised several major welfare reforms including a minimum wage increase and a boost for both pension and child care funding.

Supporters, on the other hand, praise the program’s ambition and its focus on helping low-income Koreans. They also noted that this increased coverage could lead to a boom in the medical and biotech industry.

Moon’s approval rating has remained high, increasing slightly to hit 78 percent in the days following his healthcare announcement. According to a poll conducted on August 18-19, 85.3 percent of Koreans surveys said Moon was doing a good job managing state affairs. According to the Korea Herald, “When asked about having a ‘medium burden, medium welfare’ system in South Korean society, 81.6 percent supported the idea, with more than 75 percent of the respondents saying they are willing to pay more taxes to expand welfare and solve bipolarization issues.”

While Moon will have to carefully manage the significant funding necessary to conduct this and other major upgrades to Korea’s social safety net, it seems he has widespread support among the Korean public to begin moving forward with his ambitious reform agenda.

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 Armed Forces’ photostream on flickr Creative Commons.

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Ten Useful Korean Dating Terms

By Sang Kim and Jenna Gibson

If you’ve ever been in Korea around Valentine’s Day (or Peppero Day, or Christmas), you know that Korean dating culture is no joke. To help you navigate the world of relationships in Korea, we’ve compiled a list of 10 useful Korean words to describe different aspects of dating and relationships.

Relationship Words Individual Graphics-02

금사빠 – geum sah bbah

금방 사랑에 빠지다  / 금방 사랑에 빠지는 사람 (falling in love right away)

Similar to the phrase “love at first sight,” this abbreviated word is used to describe someone who falls in love very easily and quickly, but this phrase is different in a way a person falls in love too quickly and it does not last very long.

Relationship Words Individual Graphics-01

품절남/품절녀 – pum jeol nam/pum jeol nyuh (sold out man/woman)

The literal translation is a male or female that is “sold out” and no longer available. This word is used when someone you find charming or popular is getting married or is already married.

Relationship Words Individual Graphics-06

모쏠 – mo ssol

모태쏠로 (“solo from birth”)

Someone who was never in a romantic relationship in their entire life.

Relationship Words Individual Graphics-07

초식남 – choshiknam (“herbivore man”) / 건어물녀 – gunomullyuh (“dried fish woman”)

Originated from a Japanese word 草食系, this word literally means “herbivore man.” It was initially used to describe men who are more sensitive and gentle/docile like herbivores, but now it is mostly used to describe guys who are not interested in dating or marriage. They would rather spend time and money on their self-improvement, fashion, and hobbies.

There many debatable theories behind why guys become 초식남. Some of the reasons include concerns for lack of personal life/hobbies when in relationships or once married, fatigue from relationships, financial affordability, or they simply just have no interest in dating.

Also originated from a Japanese word, 乾魚物女 from a 2003 comic, “Dried fish woman” is a female version of 초식남. This word refers to women who focus more on their career and have no desire to do anything else after work. Typical characteristics of 건어물녀 include, changing into a comfortable sweatpants/shirts after a long day at work, relaxing, watching TV and being a couch potato at home. They have no interest or desire in socializing (including dating) and would rather stay home alone.

Relationship Words Individual Graphics-08

볼매 – bol mae

볼수록 매력있다 (the more you look, more charm)

This abbreviated word is used to describe when someone who has hidden charms. They might not be the most attractive person, but once you get to know them they are more attractive and charming.

Relationship Words Individual Graphics-09

돌싱 – dol sing

돌아온 싱글 (returned single)

Someone who has gotten divorced and has “came back” to being single.

Relationship Words Individual Graphics-04

밀당 – mil dang

밀고 당기다 (push and pull)

Every relationship needs a little push and pull. In the context of relationships, 밀당often means “playing hard to get.”

Relationship Words Individual Graphics-03

썸 – ssum

Taken from the English word “something,” this describes the special something between two people who seem to have feelings for each other but haven’t taken the plunge and started dating.

Relationship Words Individual Graphics-05

뇌섹남/뇌섹녀 – nwae saek nam/nwae saek nyeo

뇌가 섹시한 남자/여자 (“sexy brain man/woman”)

Someone who is attractive because of their smarts can be described as a뇌섹남 (male) or뇌섹녀 (female). This means a man or woman whose brain is sexy.

Relationship Words Individual Graphics-10

남사친/여사친 – nam sa chin/yeo sa chin

남자 사람 친구/ 여자 사람 친구 (“male/female person friend”)

Literally translated, these two words mean “male person friend” and “female person friend.” You can use this to emphasize that the person is just a friend who happens to be a man or a woman, as opposed to a boyfriend or girlfriend.

If you liked this list, check out the other posts in our series of useful Korean words: 10 Useful Korean Slang Terms and Ten Korean Words that Don’t Exist in English.

Sang Kim is the Director of Public Affairs & Intern Coordinator. Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the authors’ alone.

Image from 김문규’s photostream on flickr Creative Commons. Graphics by KEI’s Jenna Gibson.

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Presidential Puppies in the Blue House

By Juni Kim

South Korean President Moon Jae-in garnered attention last week with the announcement of the newest presidential resident, a rescue dog named Tory. President Moon adopted the four year old dog from the group Coexistence of Animal Rights on Earth (CARE), an activist organization which campaigns against the consumption of dog meat in Asia. In addition to Tory, President Moon already has two other pets, a rescue cat named “Jjing-jjing” and a Poongsan dog named “Maru.”

In a post on the Blue House’s Facebook page, President Moon encouraged other Koreans to adopt rescue animals, stating, “About one million animals find new owners, but 300,000 are abandoned each year. We need to pay more attention to abandoned animals and care for them as a society.”

The Blue House has a long tradition of presidential pets, with many past presidents showing a preference for Korean dog breeds. The graphic below shows some of the previous pet tenants that have provided company and friendship for South Korean presidents.

Puppies

 

Juni Kim is the Program Manager and Executive Assistant at the Korea Economic Institute of America. Hwan Kang, an intern at KEI, made contributions to this article. The views expressed here are the author’s alone.  

Graphic created by Juni Kim. Image from Korea.net. 

 

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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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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.

Posted in Economics, slider, South KoreaComments (0)

A Conversation with Charlie Rangel, Former Congressman and Korean War Veteran

KEI President Donald Manzullo, a former member of the House of Representatives, recently interviewed Charlie Rangel, a former Congressman from New York and a Korean War Veteran, for the KEI podcast. Rangel was one of three current and former members of Congress who KEI recently honored for their service in the Korean War. The two former members discussed Rangel’s experiences during the war, his journey after returning from Korea, and his time in Congress.

The following is a partial transcript of that conversation. The rest of the episode can be found here.

Donald Manzullo: Charlie, we thank you for your service. You wrote a book called “And I Haven’t Had a Bad Day Since,” after the battle of Kunu-Ri – tell us about that battle.

Charlie Rangel: We got to Korea in August of 1950, and one way or another fought our way up past Pyongyang, and the Yalu River separated North Korea from Manchuria. General MacArthur had actually cut off the North Koreans, victory was ours, home was in our minds, and in September, October we were waiting to be home for Thanksgiving and Christmas. We waited September, we waited October, we waited November. The weather changed, our clothes didn’t. We were just waiting for that ship to call, to get there.

And we had heard that one of our guys … was captured by the Chinese. I started a rumor, it never entered my mind that there were really Chinese there. And for three days the entire 8th Army, including my outfit – the Chinese had crossed the Yalu River, they were talking to us with loudspeakers in broken English, telling us to surrender. Don, it was a nightmare, the trumpets would be blowing … and at nighttime, they would start their blasts.

That very day all hell broke loose, as tens of thousands of Chinese surrounded us and international troops, the screaming, the yelling, the killing. And I don’t know, I got shot and I got out of there. And like I said, I haven’t had a bad day since because so many … we had 90 percent casualties between those that were captured, killed, wounded.

And in telling this story, I just can’t see how I could be in love with anything that sounds like Korea except the Korea that’s there now. To believe that I had any part of creating a miracle for people I never knew, never heard of, a country I never thought was there – it makes me proud to be an American, and even prouder to see human beings like South Koreans who can come out of the ashes and become a world power economically.

Donald Manzullo: Charlie, your modesty – it’s always been a part of your life, even though you were one of the flashiest dressers in Congress. But during your time in Korea, you earned a Purple Heart, Bronze Star, Presidential Unit Citation, Republic of Korea Presidential Unit Citation, and three Battle Stars …. Your personal life is absolutely fascinating. Former Congressman, but you’re always a Congressman, high school dropout enrolls in the Army, goes to Korea, comes back home, trying to figure out what to do. The next thing you do is you go back and get your GED. Tell us about the march from the GED to the halls of Congress, Charlie.

Charlie Rangel: I never knew just how ignorant I was until I came out of the Army. I thought a couple of stripes made the difference the same way people get a couple of degrees. When I came out of the Army with all these medals you mentioned, pocket full of money, starched uniform, a couple of stripes, I must have felt like I was 10 feet tall until I went to get a job. They asked what could I do and I start talking about the M1 rife, the automatic carbine…and they said “next.” I was crushed.

And my brother was older, smarter, and so encouraging. He kept me from re-enlisting in the Army, which is what I was going to do. He got me a job at the garment center. I don’t know whether in your part of the country if you have hand trucks – two wheels, carry loads. And I’m carrying a load of lace – wasn’t heavy, just awkward – in the rain, and it slipped out of my hand in Manhattan in the rain, and cop’s cursing me out for blocking the traffic … I went straight to the VA, I told them “I don’t know what the hell’s going on, but I know I need some help.”

And I didn’t know how much help I really needed, I hadn’t completed high school. And the only reason I said I wanted to become a lawyer, which everyone thought was impossible, was because of my grandfather. I wanted to impress him, he was an elevator operator at the criminal court building of New York. He liked me, but he loved judges, he loved lawyers, and he loved the court system.

And I don’t know who laughed the loudest, the people at the Veterans Administration or my grandfather. But somehow we were able to work it out and I became an assistant U.S. attorney. And I got married to the most wonderful, understanding woman in the world – she had finished college while I was in high school.

Donald Manzullo: Well Charlie, I want to thank you for spending the day with us, for talking about old times.

Charlie Rangel: Well let me thank you Don. Like I said, Korea is a small country geographically, but it’s a country with a big, big heart in terms of giving hope to so many people whose countries historically have lived in poverty and never gotten out of it.

Image from KEI’s reception honoring Korean War Veterans in Congress. You can view the video of the event here

 

Posted in North Korea, slider, South KoreaComments (0)

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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.