Tag Archive | "trade"

Korean AI Market Competition Heats Up

By Hwan Kang

Elon Musk tweeted last August that AI (Artificial Intelligence) has “vastly more risk than North Korea.” So it may seem ironic to him that South Korean companies from different industries are so eager to apply AI into their services amid the ongoing missile fiasco in the North.

Major IT companies such as Naver and Kakao have announced throughout the year that the next main focal point in their businesses would be developing their own AI that can process deep learning and provide better services to the users. Naver has boasted about its devotion to AI development by acquiring Xerox Research Center Europe (now Naver Labs Europe), a leading lab in intelligence research, and aggressively investing in startups that can develop different facets of the deep learning process. On the other hand, Kakao has announced that its new subsidiary for AI research, Kakao Brain, will be personally spearheaded by Kim Beom-Soo, the visionary billionaire who founded KakaoTalk. Its plan is to catch up to the level of other leading research centers by actively recruiting developers with specialties in search patterns and natural spoken Korean.

The first tangible result from the competition in the Korean AI market is the AI speaker. Koreans are excited about the upcoming launch of AI speakers from both tech companies, who promise intelligent assistance that will integrate deeply into customers’ daily lives. These AI speakers will provide easy access to the makers’ various services through voice commands that support spoken Korean and English.

Last August, Naver got a head start on its competition when it unveiled its brand new AI speaker, “WAVE”. The speaker was met with great enthusiasm, selling its entire stock in Korea in just 35 minutes and closing pre-orders in Japan after just 5 days. WAVE uses “Clova,” Naver’s AI platform, as its operating system, and provides convenient services with smart responses. Notable functions include English speaking mode for English learners and Japanese/Chinese translation.

Kakao is also looking forward to launching its own brand of AI speakers called “Kakao Mini” later this year. Not much has been revealed about the product yet, with the website only providing a sneak peek. However, people are anticipating the speaker’s release because it’s AI program, “I”, is expected to be connected to popular Kakao services such as KakaoTalk messenger and Melon’s music app.

More intangible AI results have also been revealed to the public throughout 2017. One example is “Naver Smart Lens”, a visual AI service that can recognize letters, QR codes, and various other images. The “AiTems” system in Naver’s mobile shopping app can analyze preferences from the users’ search history and suggest certain items, even if they have not used the service before. Naver Labs has also participated in the Seoul Motor Show and announced its plans to use deep learning for autonomous cars that can use the system to learn how to detect and avoid traffic. Kakao has similarly announced its bold plan to create a “Smart Home” and apply its AI into new apartments that are under construction. It is collaborating with major construction companies such as GS and Posco to initiate its plan.

The two companies are not the only major players in the Korean AI market, though. Banks and credit card companies have emerged as participants in the market as well. Banks such as KEBHana and Woori have collaborated with telecommunication companies SKT and KT respectively to develop ChatBots. ChatBots will be able to do banking transactions and provide necessary information based on consumers’ behavior patterns. They are expected to advance non-face-to-face banking services even further. Similarly, Hyundai Card has created its own ChatBot, “Buddy,” based on IBM Watson’s natural language processing system. Jung Tae-Young, the CEO of the company, has shown his high expectations for the AI on his Facebook account, saying it will grow up and show different attitudes.

South Korea Ministry of National Defense is also considering applying AI into the country’s defense system, according to its New Year resolution for 2017. It has announced it will consider integrating AI into its cyber defenses against North Korea. In fact, the South Korean military already has something similar to AI in place. The South Korean Army has so-called “killer robots” deployed in the DMZ that work as unblinking eyes on the 38th parallel. The robots are called SGR-A1, developed by Samsung Techwin (now Hanhwa Techwin). They are considered one of the earliest autonomous robot defense systems, along with Israel’s system. Its specifications list a machine gun and grenade launcher as the robot’s primary weapons, and it is equipped with heat and motion detectors that can track down enemies without assistance from humans. They can also use a security clearance procedure with an instant shoot to kill process, but is not activated due to concerns of confusing civilians from enemies. Instead, the bots send signals back to the central base and wait for further command.

Such efforts in Korea to develop and integrate AI into various areas have many economic implications. Korean companies still lack capabilities to compete in the global market. Developing AI is therefore the smart thing to do during the so-called 4th industrial revolution, especially ones that can understand naturally spoken Korean better than their foreign counterparts.

However, Korean companies may not have the advantage of “fast followers.” According to a report from IBK Economic Institute, Korean AI products have nothing to gain from market leaders’ trial and error process because AI is so complicated and inherently closed to outside competitors. Also, since the leaders had the advantage of cornering the market on AI technology, they have had more time to reach the necessary customer base for the system to develop enough sentience, which means the market followers will have to work with the leftover margins. As a result, the major developers with more resources will have continued dominance over the AI market, which is already evident as in the cases of Apple (Siri), Amazon (Alexa) and IBM (Watson). IBM Korea has recently announced that Watson can now understand spoken Korean, so time for Korean AIs is running out fast.

Another implication has to do with an AI’s moral compass. AI programs do not have moral obligations to work for the collective good of society, but they can work to maximize a company’s profits. This means that AIs can become tools to subtly but efficiently empower companies in the market. There are already cases where pricing algorithms have been used to develop a perfect price differentiation scheme or form an indirect price cartel. The case of Dutch gas stations is an important example – different gas stations constantly changing prices in accordance with customer’s predictive needs for gas under different conditions. This was possible thanks to a “dynamic pricing” program that refreshes prices based on real time market data. What was worse was that because different gas stations used the same algorithm, it was impossible for the customers to avoid the price differentiation wherever they went, effectively forming a price cartel that maximized the company’s interest. There is no guarantee that this will not happen in Korea once AIs are set in place everywhere people go.

The vast opportunities for AI both in Korea and around the world, along with the concerns that go along with those opportunities, show clearly that we may be reaching a turning point where many conventional economic norms could change, especially for tech-savvy South Koreans.

Hwan Kang is currently an Intern at the Korea Economic Institute of America as part of the Asan Academy Fellowship Program. He is also a student of Seoul National University in South Korea. The views expressed here are the author’s alone.

Image created by Jenna Gibson, Communications Director, at the Korea Economic Institute of America from a photo by Nick Amoscato on flickr Creative Commons.

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No Reason to Withdraw from the KORUS FTA

By Phil Eskeland

Rumors flooded Washington over the Labor Day holiday weekend that the U.S. would soon withdraw from the Korea-U.S. Free Trade Agreement (KORUS FTA).  When President Donald Trump visited hurricane-damaged Houston, Texas on Saturday, he was asked by reporters about this development and responded that he would discuss the fate of KORUS with his advisers this week.

The White House may have delayed a decision on withdrawal from the agreement until the publication of the most updated monthly trade statistical information from the Foreign Trade Division of the U.S. Census Bureau at the Department of Commerce.  Earlier this morning, this data was released to reveal two interesting points.

First, while U.S. exports of merchandise goods to the Republic of Korea (ROK) in July fell by a modest 3.7 percent as compared to June, the level was 16 percent higher than July 2016.   As a result, the Year to Date (YTD) merchandise trade deficit between the U.S. and South Korea still remains well below last year’s level.  Thus far, the YTD (January – July) merchandise trade deficit between the U.S. and South Korea is $13.1 billion (vs. $18.8 billion in 2016), representing a 30 percent decrease.  If present trends continue, the trade imbalance in goods alone would drop below $20 billion for 2017.

Second, when adding in trade in services, the latest release illustrates a more complete picture.   As part of this morning’s release, 2017 2nd Quarter services data was also made public.  Once again, it shows a modest, but steady increase in U.S. services exports to Korea during the previous four quarters.  As a result, the YTD (January – June, 2017) bilateral trade imbalance of both goods and services between the U.S. and the ROK showed a decline of 50 percent (or half) when compared against a similar time period in 2016.

For the 1st and 2nd Quarters in 2016, the bilateral U.S.-ROK trade deficit of goods and services was $10.6 billion.  However, for the 1st and 2nd Quarters in 2017, the good and services trade deficit between the U.S. and South Korea dropped to just $5.25 billion, in part, because of the amazingly low goods and services deficit level of $1.5 billion for the 2nd Quarter (April – June) 2017.

For all of 2016, the U.S.-South Korea goods and services trade imbalance was $17.6 billion, representing one of the smaller deficits with any of America’s major trading partners.  If this trend continues, the U.S.-ROK combined goods and services trade deficit could be $9 billion or less for 2017, which represents near balance.

Now is exactly the wrong time to terminate the KORUS FTA.  Various tariff and non-tariff barriers to U.S. products would go up reversing the recent, hard-won progress made to lowering the trade imbalance between the U.S. and South Korea, which is one of the main goals of President Trump.  If improvements can be made to the agreement to further open markets, U.S. and Korean negotiators should take advantage of the opportunity to lock in these revisions irrespective of the possible effect on the trade imbalance.  However, a whole-scale rejection of the agreement would be unwise and counterproductive to advancing the goals of creating more prospects for U.S. exporters to sell in South Korea because tariffs (or import taxes) would snap-back to higher, pre-KORUS FTA levels, making U.S. products more expensive in Korea, particularly in relation to other foreign competitors that have a FTA with the ROK.

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 Diego Cambiaso’s photostream on flickr Creative Commons.

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Benefits of KORUS FTA Not Eclipsed by the Trade Deficit

By Donald Manzullo

When then-candidate Donald Trump first raised issues with the U.S.-Korea (KORUS) FTA in 2016, the United States had just seen its merchandise trade deficit with South Korea rise to a record $28 billion. As a candidate and president, Trump has placed an emphasis on the creation of U.S. jobs in the manufacturing sector and in reducing the U.S. trade deficit. However, much has changed since President Trump first raised his concerns about the KORUS FTA, which will be key for U.S. and South Korean trade negotiators as they prepare to meet at a session of the KORUS FTA’s Joint Committee.

As the United States and South Korea meet to discuss the free trade agreement, the United States is expected to raise its concern over the merchandise trade deficit and propose that the two countries consider amendments to the KORUS FTA to reduce the United States’ deficit. But while the original agreement was negotiated a decade ago and both sides should consider amendments to modernize the agreement to keep pace with changes in international trade, it is unclear that the FTA itself is responsible for the increase in the U.S. merchandise trade deficit with South Korea.

While the U.S. saw the deficit reach a peak in 2015, when Trump began his push against FTAs, the deficit actually declined slightly in 2016 to $27.7 and is down by nearly a third in 2017. This decrease in the U.S. merchandise deficit can be attributed to a significant growth in U.S. exports to South Korea, which began at the end of 2016, and a strong growth of 18 percent since 2011 in exports of U.S. goods covered by the agreement. Among these are exports of U.S. beef, which have risen to over $1 billion.

Since President Trump was elected, the United States has seen record levels of merchandise exports to South Korea in December, March, April, and May. Since the KORUS FTA was implemented, the majority of the growth in the deficit has come from trade in automobiles, but tariffs on imports of Korean automobiles were not eliminated until 2016. Yet, in the last year there have been fewer Korean automobiles imported into the United States.

Rather than being the cause of the U.S. merchandise deficit with South Korea, the KORUS FTA has helped to prevent the deficit from growing further. The U.S. International Trade Commission has estimated that without the KORUS FTA the U.S. trade deficit with South Korea would be $16 billion higher.

In addition, the FTA has benefited the United States in a variety of ways outside of keeping the trade deficit in check. The United States has seen strong exports of services to South Korea under the KORUS FTA, an area where the United States has a trade surplus. When the U.S. services exports are added to the $27.7 billion goods deficit, the overall deficit with South Korea drops to $17.6 billion. For every Korean who studies in the United States or visits, those are services exports that help to create jobs here. Last year, more than 61,000 Korean students studied in the United States, the 4th largest group behind China and India. Lastly, the United States has seen Korea foreign direct investment double, helping to support 47,000 U.S. jobs that earn an average compensation of $92,000.

As the United States and South Korea begin the process of reviewing the KORUS FTA, they should look for ways to expand access for producers of both countries. If there are still regulatory issues that are inhibiting the sale of U.S. autos, for example, the two sides should look for creative ways to ease those burdens so that the trading relationship remains a productive one for both parties. But they should also be leery of only judging the agreement’s success by the trade deficit. If the deficit were the only metric by which both parties judged the FTA only one would ever be able to see the agreement as a success. Instead, they should also keep in mind that the agreement has been a success for both countries and that market forces are already at work in reducing the trade deficit.

Donald Manzullo is President and CEO of Korea Economic Institute and former Member of U.S. Congress (1993-2013). The views expressed here are the author’s alone.

Photo from Saik Kim’s photostream on flickr Creative Commons.

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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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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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Is Trump Impacting How South Koreans View the United States?

By Kyle Ferrier

Claiming “Korea actually used to be a part of China” and stating “it would be appropriate” if South Korea paid for THAAD are just some of Donald Trump’s comments since his inauguration that have not been well received by the South Korean public. As President Moon Jae-in meets with President Trump this week to discuss new issues as well as longstanding ones such as the North Korea nuclear problem, his flexibility both in Washington and after his return to Seoul depends on public opinion at home. Against this backdrop, the release of two major survey-based reports in the past few days are rather fortunately timed and help to shed light on how South Koreans perceive U.S. political leadership.

The first is the Pew Research Center’s U.S. Image Suffers as Publics Around World Question Trump’s Leadership: America still wins praise for its people, culture and civil liberties, released on June 26. The second is the Asan Institute’s A New Beginning for ROK-U.S. Relations: South Koreans’ View of the United States and Its Implications, released on June 27. While the Pew report looks at a broader scope of countries and the Asan report focuses solely on the South Korean public, both ultimately provide similar conclusions: South Koreans continue to view the U.S. favorably despite negative views on Trump. However, the two provide conflicting analyses as to whether Trump has already impacted U.S. favorability and how South Koreans view the future of relations with the U.S.

From polls conducted in 37 countries, the Pew study finds that international confidence in the U.S. president has dropped from 64 percent at the end of the Obama presidency to 22 percent at the beginning of Trump’s. South Koreans do not buck the trend. When asked if they have confidence in the U.S. president to do the right thing regarding world affairs, 88 percent of South Koreans responded positively during the end of the Obama years while only 17 percent expressed the same confidence in Trump — below the global median of 22 percent. Of the 37 countries polled, this 71 percentage point swing was the fourth largest, behind Sweden, the Netherlands, and Germany. The 78 percent of South Koreans who definitively answered they had no confidence in Trump is the highest among the countries polled in Asia (the others are Japan, Australia, Indonesia, Vietnam, Philippines, and India) and is above the global median of 74 percent. Further, when asked about Trump’s major policy shifts, 78 percent disapproved of withdrawing from international climate change agreements and 80 percent disapproved of U.S. withdrawal of support for major trade agreements.

Asan presents complementary findings. It shows Trump’s favorability during the campaign was low: on their 0 to 10 ratings scale, where 0 is the least favorable and 10 is the most, Trump was below a 2 up through Election Day.  This is similar to the favorability of Japanese Prime Minister Shinzo Abe, not much higher than that of Kim Jong-un — who hovered around 1 — and dwarfed by Barack Obama — who consistently scored in the low to mid-6 range from at least the beginning of 2014 through 2016. Trump’s election boosted him from a 1.69 in November to a 3.25 in December and a 3.49 in January, but dropped to 2.93 in March before going up slightly to 2.96 in June. This jump in favorability since becoming president has given him a steady lead over Abe, but Trump remains below Chinese President Xi Jinping, who is punishing South Korea economically over the deployment of THAAD.

When asked only about the United States, Pew shows 75 percent of South Koreans view the U.S. favorably, above both the regional and global median. In addition, 86 percent view Americans favorably and 78 percent like American democratic values, both of which are also above the regional and global medians.  Further, those on the political right are more inclined to have a favorable view of the U.S., with 86 percent of respondents who self-identified as politically right favoring the U.S. compared to 64 of those on the left.

Korea Surveys

The favorability rating of the U.S. in the Asan study largely follows the trend of the Obama years, remaining around a 6 out of 10. “This suggests that the United States’ favorability is not determined solely by the favorability of its leader and that American soft power has had a positive impact on South Korean public opinion,” the Asan report states. “It appears that South Koreans have learned to distinguish between the United States, the country, and Donald Trump, the individual.”

Both reports seem to indicate that American soft power has a positive influence on South Koreans, who view the U.S. and its president separately. However, the two present contradictory findings on how Trump has impacted perceptions of the U.S.

While Asan shows only a very minor dip in U.S. favorability since Trump’s election — a drop from 5.92 in November to 5.81 in June, which is termed as “relatively stable” favorability scores — Pew finds a larger drop. The 75 percent of South Koreans who viewed the U.S. favorably in 2017 is down from 84 percent in 2015, the last year Pew data is available, and is at its lowest level since 2008. Pew suggests this follows a larger global trend. Of the 37 countries polled, 30 showed a drop in favorable views of the U.S. in 2017. Other countries experienced a steeper fall though, as South Korea’s drop in positive views of the U.S. is tied for 23rd of the 30.

The two reports are also at odds on how South Koreans perceive relations with the U.S. moving forward. Only 8 percent of Pew respondents thought relations with the U.S. would get better, 45 percent thought they would stay about the same, and 43 percent stated they would get worse. In contrast, 67 percent of respondents in the Asan study thought relations with the U.S. would improve and only 20 percent thought relations would deteriorate.

There is clearly a wide gap between the sentiments expressed in both polls, but this is likely because of how the questions were worded.  Pew framed their question around Donald Trump (“Now that Donald Trump is the U.S. president, over the next few years do you think that relations between our country and the U.S. will ___?”) and Asan framed theirs around Moon Jae-in (“ROK-U.S. Relations under President Moon Jae-in will___”.) Considering the negative views on Trump expressed in both polls and Moon Jae-In’s high domestic popularity, this disparity makes a certain amount of sense. Additionally, as no exact date is provided for when the Pew poll was conducted — the report only states spring 2017 — their findings may not reflect changes based on Moon’s election and thus may leave out any boost in confidence it might have engendered for relations with the U.S.

It may still be too early to definitively claim that Trump is impacting South Korean perceptions of the United States. But this does not mean Trump’s controversial statements, should they continue, will not influence how South Koreans view the U.S. in the future. If the outcome of the U.S.-ROK summit this week does not meet expectations or Trump makes controversial remarks in the future, South Korean public opinion of the U.S. could be pushed lower.

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. 

Images from Gage Skidmore’s photostream on flickr Creative Commons.

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Is China Helping? We Might Be Surprised

By William Brown

President Trump made lots of people a little nervous last week, tweeting that China had been “helpful” on North Korea but that “It just hasn’t worked out.” As if resigned to the inevitable, he typed “At least it tried”.  With breaking news TV stations reporting activity at the nuclear test site it seemed something actually might happen.  Maybe years of crossed red-lines was finally coming to this, a Kim Jong-un test of Trump’s resolve.  I must admit, I woke up in the middle of the night just to check my USGS earthquake tickler.  It, and KOPSI, was quiet.

 

China Tried Tweet by Trump

North Korea, we all know by now, can surprise us with a nuclear test at any time but so far, in the five months of Trump’s tenure, it hasn’t, nor has it crossed a different red line and tested an ICBM, despite warning of such in January.  Many short and medium range missiles have been test fired, of great danger to South Korea and Japan, but nothing close to one capable of hitting the US mainland.  So, while it is still early, it is fair to ask; is China finally bringing effective pressure to bear on Pyongyang to stop the tests that so worry the United States, as we and others have demanded?

China Trade May 2017

Surprisingly, after so many years, perhaps so.  Over the week-end, China released trade data for May and it seems to show, despite lots of naysaying from Washington pundits, that the economic pressure is building.  Monthly data is volatile, and this is not seasonally adjusted, but the trend clearly is not in North Korea’s favor.  Chinese exports to North Korea were fine, in fact up 19 percent in the year through May from the same period of 2016, but imports plummeted 24 percent, largely attributable to a zeroing out of anthracite coal imports.

For Pyongyang, the rise in imports and fall in exports pushed the long-term average $50 million monthly goods trade deficit to about $200 million in each of March, April, and May.  This seems unsustainable, meaning it is likely larger than the funds North Korea can garner from other activities, i.e. trade with other countries, and from services sales and remittances from overseas workers and from families who have fled, leaving their relatives.  Almost no aid is flowing into the country, the Kaesong money pot is broken, and the capital account, usually a balancer for a poor country with a large trade deficit, is likely flat given no one is willing to lend anything to Pyongyang, let alone invest. If all this is correct, imports will not hold up for long and the people will begin to experience the brunt of shortages of all kinds of imported goods.

The first of these might have already happened.  In May, after mere threats that China may reconsider its decades long provision of free crude oil, a legacy of the Mao-Kim era, lines for gasoline formed and prices leapt in Pyongyang, holding high at least through the end of May  (see May blog).

China NK Trade Surplus

Of course, one has to be cautious in depending too much on published Chinese trade data, especially in an area like this with such important policy dimensions and with great lack of transparency.  Ever since Beijing prohibited imports of coal from North Korea back in February, the data has shown exactly zero imports, an unlikely proposition.  The same can be said for other products such as precious metals although it is not true for all UN sanctioned items which have seen reductions but not to zero.  Observers have seen some North Korean coal in Chinese ports and are thus skeptical the coal really has been stopped. And Beijing has a track record of fooling around with its crude oil export data, off the books since mid-2014 (this flow is not counted in the above graphics).  If North Korea had to pay for the vital crude oil, this would likely add another $30 million or so to the monthly deficit.  And even if Chinese customs faithfully records what it sees, there is no doubt a lot of smuggling takes place.  Even so, the data, even if inaccurate, is telling North Koreans who can see it an important story; as Trump says, China is trying to limit economic interchange, a strong and worrisome message in and of itself.

China Coal May 2017

Market data should begin to help confirm if the Chinese cutback on imports is real.  With Kim Jong-un having bought in to at least passive acceptance of a partial market economy, domestic prices are reasonably free to rise sharply, if and when the market exchange rate deteriorates and demand for dollars rises. So far, except for gasoline and diesel, though, such changes have been only slight, as indicated by the DailyNK website.  And clever North Koreans may find other things to sell in exchange for hard currency or imports.  Nonetheless, price and exchange rate stability are two of Kim’s most important success stories to date and are something his father or grandfather never achieved.  It will thus be important to watch these indicators to see if Chinese pressures really are building, giving the young leader worrisome things to think about, even more than Trump’s tweets.

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.

Photo from Global Panorama’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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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.