By Troy Stangarone

On May 2, Korea and China announced that they would begin talks on a bilateral free trade agreement. In many ways, this is a significant step in bilateral relations between Korea and China. The two countries only formally established relations in 1992, and in two short decades the relationship has blossomed on an economic level. In 1992, Korea and China did very little trade with each other, but today China is Korea’s largest trading partner surpassing the United States, Japan, and the European Union by wide margins.

A Korea-China FTA would link Korea with its largest trading partner, but would also make Korea the only nation with free trade pacts with the world’s three largest economies – the United States, the European Union, and China, potentially turning Korea into a regional FTA hub. With talks set to begin soon, what should we expect from a Korea-China FTA?

1.      What Will a Korea-China FTA Look Like?

While Korea has pursued high level, comprehensive agreements with the United States and the European Union, an FTA with China will likely fall short of that standard. China has largely pursued FTAs for strategic reasons tied to geopolitical or resource considerations rather than broad market openings. While China did conclude a high quality agreement with New Zealand, Korea is a much larger economy and China may be reluctant to make concessions on major trade irritants related to subsidies, state owned enterprises, or regulations outside of a multilateral agreement.

This means that we are likely to see a range of exceptions in this agreement, and along those same lines both sides have agreed to negotiate in two stages. If they are unable to agree on what exceptions should be contained in the agreement, it will not proceed forward. One interesting thing to look at here will be the services sector. China has excluded services in some of its agreements, but with Korea’s increasing emphasis on services the inclusion of a robust services chapter could be a sign of a higher level agreement on the Chinese part.

2.      What Are the Benefits for Korea of an FTA with China?

While countries such as the United States have seen their trade deficits with China widen since it joined the WTO, Korea has seen its trade surplus with China grow from $2.9 billion in 2001 to $39.3 billion in 2010. Korea’s exports to China have grown from $10.4 billion in 2001 to $111.3 billion in 2010, about $19.4 billion more than the United States.

Given Korea’s success in the Chinese market, and that China is still a significant platform for Korean exports to the United States and Europe, Korea would seem to have a good deal to gain from an FTA with China. One study has indicated that an agreement could increase Korea’s economic output up to 1.25 percent within five years and by 3 percent within 10 years of the FTA taking effect.

Korea has done well in exports of electronics and steel to China, despite China’s own success in these areas.  While China may be reluctant to address a wide range of subsidies or regulations, the FTA does represent an opportunity for Korea to seek reductions in states subsidies or improved regulations related to foreign direct investment that would benefit Korean producers in key areas.

 3.      What are Some Potentially Sensitive Issues for Korea?

With both the United States and the European Union, agriculture was a sensitive issue for Korea. However, in both of those agreements, along with expectations for potential agreements with Australia and New Zealand, Korea opened up significantly to foreign agricultural products.  On one level this is necessary as Korea only has the arable land to grow about half of its food, but its prior FTA partners are also developed nations with higher cost agricultural products. But opening up to China’s agricultural sector would be different. China is both geographically closer and more likely to directly compete in the products that Korean farmers grow.  There are also likely to be greater concerns regarding the sanitary aspects of Chinese produce. In terms of the economic impact of agriculture from China, the Korea Institute for International Economic Policy estimates an FTA with China would cause farm production to fall about 15% within a decade. Just as Korean farmers protested against the U.S.-Korea FTA, they have already begun protesting against an agreement with China.

4.      What About North Korea?

Korea and China have both indicated that they are open to discussing the inclusion of outward processing zones in the agreement. It seems likely that the two sides will strike a deal to allow goods from the Kaesong Industrial Complex and China’s own potential zones in Northern China to receive preferential treatment. While this would provide a boost to production in Kaesong in the short-term, it could in the long-run lead to conflicts with the United States. The sanctions on North Korea currently prohibit the importation on any non-Office of Foreign Assets Control approved goods or parts. If goods assembled in China were to include parts manufactured in Kaesong, they would run afoul of these sanctions.

5.      What are the Broader Implications?

While some have speculated that an FTA between Korea and China would bring tensions between the United States and Korea, this seems unlikely. As has been previously mentioned, the agreement between China and Korea will unlikely rise to the level of the KORUS FTA and the agreement is more directly a response by China to the KORUS FTA. In terms of the alliance, it is doubtful anyone in Washington or Seoul will confuse this for more than a commercial agreement between two key economic partners.

However, beyond the question of the alliance, the agreement could have implications for trade in East Asia. With the push for a broader Trans-Pacific Partnership (TPP) agreement, questions have become more focused on what Asian economic integration should look like. In the trade arena, there are competing visions of an East Asian FTA centered on ASEAN and the TPP. Because of Korea’s size as a trading nation, it could have significant influence on this process. However, there is also the possibility that once it has an agreement in place with China, the Korean preference could be to maintain its bilateral agreements and not become involved in what some view as a competition between China and the United States.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

Photo from Korea.net photo stream on flicker creative commons.

By Troy Stangarone

Nutritional aid might not be the only cost of North Korea’s recent failed satellite launch.  Only a few months prior to Kim Jong-il’s death there had been significant discussion of building a pipeline to transmit Russian gas through North Korea to the South. North Korea had indicated that it would be willing to take part in the project and South Korean President Lee Myung-bak had agreed to work closely with Russian President Dmitry Medvedev to push the project forward. Now, only a few months into the new regime under Kim Jong-un there are real questions if the project is viable.

On the surface, the pipeline made sense for all parties involved at the time and Kim Jong-un had indicated his support for the project in April. The Russian Far East is rich in natural resources, including natural gas, and tapping the South Korean market would allow Russia to diversify its exports away from European markets and place pressure on China in their stalled gas talks. For South Korea, which is dependent on imports for its energy needs, the pipeline promises a supply of natural gas potentially 30 percent below what it currently pays. For North Korea, which is seeking to prop up its economy the project presents the prospect of a significant infusion of hard currency from the estimated $100 million dollars in annual transit fees the pipeline would provide. Everyone would seem to have something to gain.

Under Kim Jong-il, one could have been fairly confident that the political risk surrounding the project could be managed based on the experience of the Kaesong Industrial Complex. While Pyongyang has sought raises for workers beyond the contractual agreement between North and South Korea in the complex, it has also refrained from interfering in the complex’s operations during periods of heightened tensions between the two sides.

Russia and South Korea in their talks in the fall had also taken steps to try to disincentivize North Korea from interfering in the pipeline. Russia would be responsible for the transit fees, and has indicated that it’s willing to structure the contract so that it is responsible for delivering the gas to South Korea if Pyongyang were to interfere with the pipeline. Additionally, South Korea has proposed running the pipeline to Seoul before it cuts back up to Pyongyang, meaning North Korea would cut off its own gas supply if it were to interfere with the pipeline. These steps would take away potential leverage that North Korea would gain from the pipeline, but still leave the possibility that Pyongyang could try to tap the pipeline upstream for its own uses. The project had been promising enough that Gazprom and Kogas held talks as recently as April 9 to discuss the commercial parameters of the project.

However, with North Korea having defied international consensus to conduct its satellite launch, made suggestions that it will turn parts of  Seoul to “ashes”, and a third nuclear test in the offing it would only seem prudent for all of the parties involved to reassess their positions in the project. Even if the rhetoric coming out of Pyongyang is dismissed as par for the course, the prospect of a significant financial return for the regime from the pipeline has not tempered the regime’s actions. At the very least it would seem there is a significant prospect of the project being delayed. After the missile launch the United Nations Security Council statement stated that “If North Korea chooses to again defy the international community, then the Council has expressed its determination to take action accordingly.” Pushing forward with the pipeline project in this environment could send both the wrong message to the new regime in Pyongyang and lead to the unfortunate appearance of providing the new regime with a significant cash infusion at a time when it has taken multiple actions condemned by the international community.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

Photo from Leftik’s photo stream on flickr Creative Commons.

By Nicholas Hamisevicz

Next week, President Lee Myung-bak and South Korea will host numerous leaders and heads-of-state from around the world for the 2012 Nuclear Security Summit. On the sidelines of the summit, President Lee will host approximately 27 bilateral meetings with various counterparts, including Prime Minister Manmohan Singh of India. After a year dedicated to Korea-India relations that included significant cultural exchanges but is still growing substantively, the upcoming summit meeting between President Lee and Prime Minister Singh represents an important opportunity to further strengthen the strategic ties of two of Asia’s rising economies.

In 2010, Korea and India pledged to elevate their relationship to a strategic partnership. With India’s rapid economic growth and growing international role, Korea’s future prosperity will increasingly be tied to India’s own prosperity. As two of Asia’s leading democracies, they also make natural foreign policy allies who share common interests across a wide range of issues.

This meeting between President Lee and Prime Minister Singh can begin to lay the groundwork for the future of the strategic partnership between South Korea – India. Together the two leaders could develop goals that encourage and emphasize to their respective ministries to meet and work toward cooperative projects that build the strategic relationship.  Beyond laying the groundwork for future meetings, the two allies have much to discuss.      

Early descriptions from the Indian and South Korean governments suggest the two sides understand the significance of the meeting. India’s Foreign Secretary Ranjan Mathai previewed the meeting, indicating an agreement on visas will be signed and a Joint Statement will be issued. Foreign Secretary Mathai suggested meetings of the Joint Commission co-chaired by the Foreign Ministers of South Korea and India as well as South Korea’s Defense Minister visiting India will take place in 2012. The Joint Statement from this meeting and the previous Lee-Singh statement will be key starting points for these ministerial meetings. South Korea and India have already had a Director-General level meeting of their Foreign Ministry divisions that cover South and East Asia respectively in 2012. Yet this meeting should be occurring more often than every three years if South Korea and India are to have a true strategic partnership.

In addition to the security and political aspects of a bilateral relationship, economics plays an increasingly large role in connecting countries in Asia. Prime Minister Singh has already been preparing for economic discussions with President Lee. Prime Minister Singh’s office recently held a meeting to discuss POSCO’s steel project in Orissa, India. POSCO has the single largest foreign direct investment in India, but plans for further implementation have had starts and stops because of approval and legal delays.  Furthermore, local residents have been protesting the allocation of land to POSCO for the whole project, compensation for moving, and environmental concerns. POSCO has refused to start construction on the land until all of these issues are cleared up and it is given confidence that it can start its project without delay.

On the free trade front, South Korea and India signed their Comprehensive Economic Partnership Agreement (CEPA) in 2009, and it entered into effect one year later. However, there are some concerns surrounding its implementation. South Korea and India were quietly trying to renegotiate some of their CEPA, and there have been reports that some on both sides are not benefitting from the deal. Prime Minister Singh and President Lee will have to emphasize the importance of the CEPA for both countries overall development and point to positive success stories to counter any negative feelings over the deal.

South Korea and India need to continue to build on previous meetings to develop a lasting strategic partnership. This particular meeting between President Lee and Prime Minister Singh presents more difficult circumstances than a normal bilateral visit with President Lee hosting the Nuclear Security Summit and numerous important bilateral meetings. However, some of the early meetings preparing for this summit, preview statements, and suggested future meetings between South Korean and Indian officials indicate both sides see an important opportunity to create momentum to support for the enhancement of the strategic partnership between South Korea and India.   

Nicholas Hamisevicz is the Director of Research and Academic Affairs for the Korea Economic Institute. The views represented here are his own.

Photo from Korea.net’s photo stream on flickr Creative Commons.

With the KORUS FTA set to come into effect, The Peninsula talked with Amy Jackson of the American Chamber of Commerce five questions about the benefits of the KORUS FTA, the politics around the agreement, and the future of U.S.-Korea economic relations:

1.  With the KORUS FTA set to come into effect on March 15, what are some of the immediate benefits we should be looking for (U.S.)?

The KORUS FTA is a comprehensive agreement covering substantially all trade in goods, services and agriculture.  Both nations will benefit significantly from an increase in trade and investment across all sectors through the elimination of tariffs and other trade barriers. 95% of tariffs on consumer and industrial products will be eliminated in the first five years of implementation, and most remaining tariffs will be eliminated within ten years (USTR). The U.S. International Trade Commission (USITC) estimated in 2007 that the KORUS FTA would increase U.S. exports to Korea by $10-11 billion annually as well as increase U.S. GDP by at least $10 billion.

Today’s Korean market is crucial as a ‘test bed’ for entering the Asian market. Consumers demand high tech and high quality, regardless of industry or sector, and Korea is now seen as a ‘trend setter’ nation among its neighboring countries.  So winning over Korean consumers, is good for U.S. companies’ competitiveness elsewhere in Asia.  Further, U.S. companies compete head-to-head with European companies in the Korean market in a variety of sectors. The Korea-EU FTA went into effect eight months ago, so one key immediate benefit of KORUS is that American companies can compete on a level playing field with EU companies in Korea.

Although KORUS covers virtually all sectors, a number of American industries will benefit in particular from the KORUS FTA, including the agricultural, auto, textile and apparel, manufacturing, pharmaceutical, medical devices, and financial and other service industries. Taking a look at the agricultural and food processing sectors, for example, on March 15, almost two-thirds of U.S. exports of agricultural products to Korea will become duty-free, including wheat, corn, cherries, almonds, orange juice and wine. The USITC estimated that sale of agricultural products would be from $1.9 billion to $3.8 billion (44% to 89%) higher than exports under a no-agreement scenario (Congressional Research Service paper, March 2011).

The KORUS FTA will also phase out Korea’s 40% tariff on U.S. beef over the next 15 years, which the USITC estimated could increase U.S. beef exports from about $600 million to almost $1.8 billion (58% to 165%) above what would be the case otherwise.

Small and medium-sized manufacturers of both nations are in particular expected to strongly benefit from the KORUS FTA. In a statement issued by the U.S. National Association of Manufacturers in February of 2012, nearly 19,000 small and medium-sized American companies export goods to Korea, representing 90 percent of total U.S. exporters that can benefit from trade liberalization.

The KORUS FTA will also lead to an increase in win-win partnerships between Korean and U.S. firms.  GM already has a partnership with LG Chemical in battery supplies, and other U.S. companies—both large and small—can form fruitful partnerships with Korean companies, whose global competitiveness in technology, quality and managerial practices continues to grow.

Last, but not least, KORUS contains substantial obligations with regard to regulatory transparency, investment policies, intellectual property and services liberalization.  These will help improve Korean economy’s transparency, consistency and predictability, thus improving the business environment and giving both domestic and foreign firms greater security in planning their business strategies and pursuing new investments.

2.  With the Euro crisis limiting the impact of the EU FTA and China’s growth expected to slow, what opportunities does the KORUS FTA provide Korean businesses now that it looks like the U.S. economy might be showing signs of life?

Like their U.S. counterparts, Korean businesses, on the whole, view the KORUS FTA as an important business opportunity. Many Korean companies today are global leaders in the auto, shipbuilding and consumer electronics sectors, and Korean companies are increasingly willing and able to compete with foreign companies in their own market and globally.  Korean companies that can compete well in America, have excellent chances of competing on a global scale.

Further, Korean policymakers have emphasized the need to boost the competitiveness of Korea’s service industries, and this is something many Korean businesses are eagerly anticipating.  KORUS is expected to help mature Korea’s service industry and spur greater productivity and innovation through competition and partnerships with foreign firms.  This will help drive down price of legal services, accounting and other services.

Korea also has an eye to promoting growth in other key sectors of its economy such as healthcare and financial services.  KORUS will help new Korean exports gain access to the U.S. as well as preserve and consolidate Korean companies’ existing share of the U.S. market in the face of growing competition from emerging East Asian producers as the elimination of even low tariffs will give Korean exporters a price advantage.

Korea’s small and medium-sized enterprises (SMEs) are expected to strongly benefit from the KORUS FTA and, as in the U.S, this is important because supporting SMEs will help Korea create more jobs as well as address income inequality, something that the Korean government is very keen on. The Chairman of the Korea Federation of Small and Medium Business (Kbiz), Kim Ki-moon, stated that the KORUS FTA will not only increase Korean SME’s exports to the U.S, but also expand opportunities to form partnerships with U.S. companies, allowing technology transfer and more foreign direct investment (FDI) into the Korean economy.

3.    The opposition in Korea has called for renegotiation of some of the KORUS FTA’s provisions. What impact do you see this having on the implementation and the agreement’s future?

The KORUS FTA went into effect at midnight this morning without a hitch. I think it is important for people outside of Korea to understand that the majority of the Korean people support the KORUS FTA and recognize that the agreement will benefit Korean workers and businesses as well as strengthen the important U.S.-Korea alliance.  Once we begin to see tangible benefits from the FTA, I believe the tone of discussion here will change.

To the extent that policymakers on either side have concerns related to the agreement, there are mechanisms in place where issues can be addressed a cooperative and constructive manner.  No free trade agreement can benefit every citizen in any country.  Already the Korean government, like the U.S. government, has introduced various policies to help ameliorate the negative effects of its FTAs and to assist farmers and companies that could be disadvantaged by an FTA as the Korean market opens.

I think it is crucial to continue to raise public awareness about how KORUS benefits consumers of both sides, and educate companies how they can reap all the benefits of the KORUS FTA.  We at AMCHAM are working in concert with our Korean business partners and the Korean government in such efforts.

4.    Most of the attention on the KORUS FTA was focused on the negotiations. There is a tendency that once agreements are negotiated and go into effect to simply focus on the next deal. What do we need to work on to make sure that the KORUS FTA fulfills its promise?

The U.S. business community understands that it is crucial that we educate the public, workers, and government officials on both sides of the Pacific about:  1) what is in the FTA that can benefit them; and 2) concrete benefits that come out of the KORUS FTA.  We are already focusing on #1 — AMCHAM will be co-hosting a day-long “KORUS FTA Utilization Seminar” with the Ministry of Strategy and Finance (MOSF) on Thursday, May 3rd.  The seminar is aimed at helping both Korean and U.S. companies, large and small, better understand the provisions in the FTA and how they can best utilize them. We are expecting a significant turnout, and attendees will be able to hear directly from the KORUS FTA negotiators themselves among others.  Issues to be discussed include customs procedures and rules of origin, intellectual property rights (IPR) protection, regulatory transparency, and how Korean small & medium sized enterprises (SMEs) can benefit from the FTA.

In addition, AMCHAM will be hosting visiting Congressional delegations as well as business and local government groups from over 22 U.S. states this year who are interested in forming partnerships and doing business in Korea.  We will use these opportunities to help forge new U.S.-Korea business ties as well as to highlight early gains from the FTA.

5.    There are two competing visions of trade in Asia, one that is trans-Pacific and one that is Asia centric. How does the KORUS FTA fit into these visions and what do you see as the future of U.S.-Korea economic relations?

Although there are many bilateral FTAs in effect within Asia, the KORUS FTA is considered the “gold standard” because of its comprehensive scope and detailed rights and obligations. It covers substantially all trade in goods, services and agriculture, as well as obligations with regard to regulatory transparency, investment policies, intellectual property and services liberalization. It is not surprising that when the EU and Korea began their bilateral talks in 2007, they used KORUS as their initial negotiating text.   KORUS is also the model used in the development of U.S. proposals for the Transpacific Partnership agreement (TPP).   As such, KORUS is already serving as an important model for economic integration in the Asia-Pacific region.

President Obama has signaled a strong interest in increasing U.S. ties to the Asia-Pacific region.  The ratification of the KORUS FTA as well as the launch of TPP negotiations are one – but an important – element of the Administration’s heightened engagement in the region.  Further, U.S. and Korean leaders recognized that the KORUS FTA would provide an important opportunity to strengthen the U.S.-Korea strategic alliance.  As we like to put it, KORUS adds a third economic pillar to the already strong political and military relationship.

While Korea and China are contemplating a near-term launch of a bilateral FTA, we do not see this as a threat.  Firstly, as currently envisioned, this FTA will not be as comprehensive as KORUS.  Further, a Korea-China can offer new benefits to U.S. companies already operating in Korea.  A Korea-China FTA can also become a part of an overall TPP framework in the future, with the U.S. as a key partner.  More broadly, a Korea-China FTA can contribute to peace and stability in the region through deeper economic relations and commitments with China, a rising regional power.  In this sense, American business community welcomes such initiatives.

Photo from Harris Walker’s photo stream on flickr Creative Commons.

By Troy Stangarone

After more than six years of negotiations, debate, and delay, the U.S.-Korea Free Trade Agreement (KORUS FTA) will come into effect tomorrow. Expectations for the agreement run high, especially in Korea where there has been significant public debate over the KORUS FTA. Starting tomorrow we will begin to see if the agreement is an important economic shot in the arm for Korea and the United States during an uncertain economic time globally or if it will lead to the unexpected consequences that opponents argue lie ahead. With that in mind, here are five issues to consider as the KORUS FTA comes into effect:

1.      What Will Be the Economic Impact of the KORUS FTA?

Expectations will be high, but the agreement needs to be judged on its long-term benefits not short-term results. The EU agreement, which is very similar to the KORUS FTA, has presented a mixed picture so far. In the first four months the EU agreement has been in effect, Korea’s overall exports to the EU have fallen as a result of a drop in orders for ships stemming back to the 2008 financial crisis and the slowdown in overall growth in Europe over the last year. At the same time, Korean exports for goods that either fully or partially saw their tariffs removed are up 14.8 percent according to an analysis by the Korea International Trade Association. 

The immediate benefits of the FTA will likely be seen by consumers, who are already seeing the cost savings as supermarkets in Korea have recently announced cuts in U.S. food and beverage products. However, Korean exporters should benefit as well. Major U.S. firms such as Wal-Mart, Caterpillar, and GE Aviation have all indicated the FTA will factor into how they source their products.

Overall, though, the expectations are well known. The U.S. International Trade Commission (USITC) estimates that once fully implemented the KORUS FTA will increase U.S. exports to Korea by $10-11 billion, while raising U.S. GDP by $10-12 billion. The same report estimates that Korea’s exports to the United States will grow by $6.5-6.9 billion dollars, while the Korea Institute for International Economic Policy estimates that the FTA will increase Korea’s GDP growth by 5.7 percent over the next decade.

2.      Can the U.S. Auto Industry Succeed in Korea?

This is another area where Korean consumers will benefit from the agreement. Korea’s tariff on autos will be cut from 8 to 4 percent immediately, and U.S. producers are expected to make a strong push into the Korean market. GM has announced price cuts in advance of the agreement, Ford plans on increasing its presence in the Korean market, and Chrysler plans on introducing more models in its showrooms. Additionally, Toyota has made plans to take advantage of the FTA by exporting cars to Korea from the United States. According to the Korea Herald, the FTA could see exports from the United State rise from under 10,000 vehicles a year to 75,000.

3.      What Will the Impact Be on Korean Agriculture

As with any trade agreement, agriculture was a sensitive issue with Korea. However, concerns about the KORUS FTA’s negative impact on Korean agriculture may be overstated. Korea is highly dependent upon imports of food, only growing a little more than 50 percent of its food. Among some of the agricultural products that gain attention, U.S. beef largely competes with Australian beef rather than Korean beef, while rice was excluded from the agreement and oranges only see tariff reductions when they are out of season in Korea. One other factor to consider is the Chile FTA. When it came into effect in 2003 there were widespread concerns that it would have a detrimental impact on Korean agriculture and those fears have not come to pass.

4.      Can Korea Become an FTA Hub?

The KORUS FTA is not only the template for the EU-Korea FTA, but also the potentially much larger Trans-Pacific Partnership. As Korea prepares to start negotiations with China later this year, it could find itself in the advantageous position of being the only country that could connect the world’s great developed and emerging markets together. The challenge for Korea will be to make itself a hub for all of the agreements taking place around it.

5.      Will Korea Seek to Renegotiate the FTA?

With elections approaching for the National Assembly and presidency in Korea, the opposition has called for the renegotiation of the KORUS FTA and suggested that they might consider withdrawing from the agreement should their demands not be met. Recent polling in Korea suggests that support for the Democratic United Party (DUP) is slipping in Korea, but they are still expected to gain seats in the National Assembly and come close to a majority in the National Assembly. Public opinion in Korea is divided on DUP’s position on the FTA, leading the DUP to back off of its talk of withdrawing from the agreement. Until we see how the National Assembly and presidential elections play out in Korea, it will be difficult to know if this represents a significant change in Korea’s trade policy or merely electoral politics.

However, their stand on renegotiation could make it difficult for the United States to resolve longstanding concerns on restrictions on U.S. beef in the Korean market. Having promised Senator Max Baucus that the United States would request consultations under the current beef protocol to allow in all cuts and ages of U.S. beef, the Obama administration may have to delay this to avoid Korean requests for changes in other areas.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views represented here are his own.

Photo from Kevin Collins photo stream on flickr Creative Commons.

By Sarah K. Yun

At the recent talks between North Korea and the United States in Beijing, U.S. Special Representative for North Korea Policy, Glyn Davies, once again stressed the importance of restored inter-Korea relations in order to resume the Six-Party Talks to Kim Gye Gwan, North Korea’s First Vice Minister of Foreign Affairs.  Although the two Koreas are the parties most directly impacted by the security issues surrounding the Korean Peninsula, inter-Korea relations have been tense over the years, although some landmark accomplishments remain as symbols of inter-Korean cooperation.  On the other hand, the Cross-Strait relations have improved dramatically since 2008.  What caused such different outcomes?  What lessons from the Cross-Strait relations can be applied to inter-Korea relations?

Inter-Korea relations and Cross-Strait relations are inherently different in nature, history, and scope.  However, the two cases have interesting parallels from their Cold War split, largely driven by the ideological divide between capitalist democracy and communism.  They are also similar in that domestic politics plays an important role within the relations.  Additionally, the U.S. has played a key and complementary role in both relations through its support for Taipei’s engagement with Beijing and President Lee’s efforts to deter provocations by North Korea.

Despite these similarities, the two Koreas and the two China’s have taken divergent approaches to resolving their long standing separations. Experts have characterized Cross-Strait relations as “No Talks, Many Actions.”  There have been few official talks between the two sides but, a recent influx of trade, visits, investments, and exchanges.  However, these have been recent changes. Historically, communication between China and Taiwan ceased during the Cold War.  In 1979, after gaining confidence within the international community, China proposed the “Three Links” (trade, postal service, and transportation) and “Four Exchanges” (academic, culture, sports, and science and technology) to Taiwan.  Taiwan was not prepared to accept China’s offer at the time, therefore responded with the “Three Nos” policy of no contact, no negotiation, and no compromise.  In 1987 that changed. Taiwan began to allow visits to China and established two trade zones for Taiwanese companies in Fujian province in 1989.  During this period, Taiwan also renounced intentions to militarily recapture China.  In 1991, Taiwan officially declared end to hostilities and recognized the legitimacy of the Chinese Community Party.  Just when relations were on the road to improvement, then President Lee Teng-hui and his successor Chen Shui-bian argued for a Taiwan national identity separate from mainland China. 

All of this was reversed dramatically by the election of president Ma Ying-jeou who argued for the improvement of Cross-Strait relations in six stages: 1) charter and direct flights, 2) economic and financial cooperation, 3) investment and trade, 4) Taiwan’s participation in international organizations and non-governmental organizations, 5) promotion of a Cross-Strait common market and Taiwan’s participation in the East Asian economic integration, and 6) a peace accord and confidence-building measure.  He also implemented his own “Three Nos” policy to include no unification, no independence, and no use of force.  The current challenge, however, is that the Cross-Strait relations are successful at cooperation and exchange, but unsuccessful at creating a linkage between economic relations and political transformation.  In other words, this framework is effective in maintaining status quo, but ineffective in creating political spillovers.  The ultimate goal is not reunification, but a comparative advantage that China and Taiwan are able to gain economically and diplomatically from improved Cross-Strait relations.  The Economic Cooperation Framework Agreement (ECFA) was the epitome of improved Cross-Strait relations based on the economy-first paradigm. 

On the other hand, inter-Korea relations have been described as “No Actions, Talks Only.”  Although many official-level talks took place and declarations were announced between the two Koreas, it has had limited political spillover due to the fact that the Kim regime habitually exploited the cooperation projects.  Inter-Korea relations have for the most part been sustained by large-scale projects such as the Kaesong Industrial Complex, Mount Kumgang tourism, reunion of  separated families, and a few others.  A complete replication of the Cross-Strait framework would be difficult for the Korean Peninsula since North and South Korea have too much asymmetry of economic and political power as a result of North Korea’s military-first policy.  In essence, the current inter-Korea relations are focused on a framework of politics-first. 

What if the inter-Korean model also focused on economic integration first by stabilizing economic and trade relations?  This could create a platform for North Korea’s economy to be integrated into the region and provide an opportunity for North Korea to rethink its position in the world economic order.  In return, South Korea could play the role of Taiwan in supplying needed capital to a reforming command economy and would be able to benefit from  lower labor costs, access to raw materials, and decrease future reunification cost by reducing the economic gap between the two Koreas.  This would require a framework change in a way that the two Koreas view the inter-Korea relations from a perspective of ideology to one of practical economic interest.  Focusing on the economic aspects would bring political spillover effects, as in the case of Kaesong Industrial Complex where more than 50,000 North Koreans are employed by the South Korea-run companies.  These North Korean laborers are empowered financially and economically compared to others across the country.  Overall, a comprehensive strategy like the Ma Ying-jeou’s six-step plan may be needed in Korea, but it would require two willing partners. 

Whereas inter-Korea relations have undergone many challenges in the recent years, Cross-Strait relations have faced a dramatic détente.  The key point is that China reached out to Taiwan only after it gained status and confidence in the international community.  In other words, it did not feel threatened by Taiwan nor the international system, which was a product of China having a better economic foothold in the world.  From this, one can gather that unless North Korea’s economy is developing and industries being diversified, reconciliation and reunification may face more challenges.  Although  inter-Korean and Cross-Strait relations are not the same, a lesson learned from China and Taiwan’s experience is that economic cooperation is a key to closing the gap and improving inter-Korean relations. 

Sarah K. Yun is the Director of Public Affairs and Regional Issues for the Korea Economic Institute. The views expressed here are her own.

Photo from  Beautiful Taiwan’s photo stream on flickr Creative Commons.

By Troy Stangarone

In recent years, the perception of Korea on the global stage has begun to change. This shift is partly a reflection of Korea’s emerging economic stature. While China may get much of the press, decades of economic success have led other developing nations to view Korea as a model for economic development, a role which Korea has begun to embrace.  At the same time, Korea’s own economic growth has seen it become one of the top ten trading nations and an emerging voice in global economic forums such as the G-20.

While Korea’s economic success has brought it a more significant role on the global stage over the last few years, that same success has also expanded Korea’s national interests around the globe. This is perhaps nowhere more evident than in the Middle East, where Korea’s interests and relations are rapidly changing.

While the Middle East has long been a source of energy imports, Korea’s own trade with the region was often limited, though the region was a significant source for construction projects. In the last decade alone, Korean exports to the Middle East have grown from only $7.1 billion in 2001 to $34 billion last year, or nearly two-thirds of Korea’s exports to the United States. At the same time, the Middle East remains a key supplier of energy to power the Korean economy with the region accounting for about 87 percent of Korea’s oil imports and nearly 50 percent of its imports of natural gas.

Korea’s dependence on the Middle East for energy and its success in developing export markets in the region gives Korea a strong interest in peace and stability in the region. At the same time, Korea is seen as a more attractive partner in the Middle East. In a recent interview with the Korea Times, Saudi Arabia’s Ambassador to the Korea said that “The Kingdom pays special attention to its relationship with the Republic of Korea, in recognition of Korea’s leading role in the international community.”

The enhanced standing that Korea is developing in the region was evident on President Lee Myung-bak’s recent trip. Ostensibly about securing commitments for increased oil supplies from the region in anticipation of cooperating in U.S. sanctions efforts towards Iran, President Lee left the region with an agreement to raise Korea’s relationship with Turkey to that of a strategic partnership, the establishment of a high level cooperation committee to handle cooperation between Qatar and Korea on economic and security issues, and an agreement to negotiate a defense cooperation pact with Saudi Arabia, which will send its first military attaché in Asia to Korea.

On the economic side, President Lee also saw benefits. With indications that Korea is preparing to cut its imports of oil from Iran (which accounts for roughly 10 percent of Korea’s oil imports) by upwards of 50 percent, Korea secured a pledge from Saudi Arabia to make the difference in any oil shortage and a new 20 year contract to supply crude oil to Korea.  Qatar also agreed to a 20 year contract to provide Korea with an additional 2 million tons of liquefied natural gas per year.

With the region as a whole undergoing significant political change, Korea’s growing ties with Turkey could also be a strategic benefit to Korea in the long run as many of the transitioning governments in the region look to Ankara as an exemplar of Middle Eastern democracy. To those ends, Korea and Turkey are already in the process of negotiating an FTA that could serve as a broader Middle East export platform for Korea and the two sides also agreed to resume talks on the construction of two nuclear reactors in Turkey. If successful, the talks would represent the second major nuclear contract for Korea after its 2009 deal to build four plants in the United Arab Emirates.  

However, despite growing ties to the Middle East, Korea also finds itself more exposed to instability in the region. The current confrontation with Iran has put the majority of Korea’s oil imports at risk should tensions over Iran’s suspected nuclear program break out into conflict, while the tumult of the Arab Spring has impacted Korea’s exports to some of the impacted nations in the region, such as Libya where exports fell from $1.4 billion in 2010 to a mere $181 million in 2011. While not as extreme a drop, even exports to Egypt fell from a high of $2.2 billion to $1.7 billion as a result of the transitions taking place in the region.

Korea has been able to benefit from increasing exports to the Middle East as part of a conscious strategy to diversify its export markets. Beyond the Middle East, Korea has also made increasing inroads into Latin America and Africa and has developed a strategy of using FTAs to ensure that Korea is not dependent upon any one market for its exports. At the same time, while Korea has been pursuing more renewable resources and energy efficiency under its “Green Korea” policies, it has not yet been able to successfully diversify the sources of its energy imports.

In the long run, Korea is likely to benefit substantially from enhanced ties with the Middle East. If new, democratic governments in the region are able to expand the benefits of economic growth to the wider population, Korea would likely benefit from increasing consumer markets in the region. However, as its energy and economic ties to the region increase, Korea will also find itself increasingly caught in the conflicts of the region. So far, Korea has managed to navigate these challenges in the Middle East well, as long as it continues to do so it will likely see its status in the region rise. 

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute. The views expressed here are his own.

The photo is from the dead pixel’s photo stream on flickr Creative Commons.

By Sarah K. Yun

Until the 1990s, Korea had little economic, political, or cultural ties with Latin America. Since then, relations between Korea and Latin America have improved significantly. On the other hand, the relations have not been developed in a comprehensive multi-dimensional manner. 

The economic relationship has been the most dynamic and salient aspect of Korea-Latin America relations over the past decade due to the natural complement between their respective markets. Latin America is a major source of natural resources, raw materials, and manufacturing, which are important to Korea’s manufacturing and high-technology industries. Latin American countries, such as Brazil, are an attractive export market for South Korean consumer products, such as computers, TVs, and cars. Furthermore, given increased competition from China and other Asian economies for the African and Southeast Asian mineral market, Latin America may provide a secure natural resource bedrock for Korea.

Recognizing the advantage, Korea has been engaging in trade diplomacy with Latin America with an emphasis on establishing an architecture built around free trade agreements. Korea’s first FTA in 2003 was with Chile, and it recently concluded an agreement with Peru. At the same time, Korea is interested in reaching an agreement with MERCOSUR in South America.

According to a recent Inter-American Development Bank report, principally authored by Mauricio Mesquita Moreira, trade between Korea and Latin America has grown at an annual average of 16.1% over the past two decades. Latin American countries are also beginning to recognize economic opportunities with Korea and diversification beyond North America and China.

Political and cultural relationships, on the other hand, have been secondary to economic engagement. It was not until around 1996 when diplomatic ties began to form between the two regions, signaled by Korean presidential visits to Latin America. Cultural ties have also been limited, and unlike in Asia, the Korean Wave has not yet crested in Latin America.

Regarding development aid, Korea’s official development aid (ODA) to Latin America in 2009 was less than a fifth of the ODA committed to Asia. Furthermore, only 5.9% of the cumulative total of loan commitments made by Korea between 1987 and 2009 were given to Latin America. In an environment where Korea is just beginning to establish partnerships in the region, ODA and other cooperative programs can be used as an avenue to increase awareness and presence of Korea in Latin America. In other words, Korea’s engagement via soft power and cultural diplomacy can create a multi-faceted and dynamic bilateral relationship. Consequently, Korea can create opportunities to capture the attention of Latin American governments and businesses.

Korea can be the pivot point between the developed and the developing countries such as the U.S. and Latin America. In this regard, there are potential opportunities for U.S.-Korea collaboration in the region. The U.S. and Korea can boost public policy and development cooperation by assisting in areas that face challenges in Latin America such as educational institutions and technological development. Korea can also benefit from partnering with the U.S, who has had a long-time presence in Latin America.

There are clear potential advantages for a deeper relationship between Latin America and Korea. Latin America would benefit from increased interaction with Korea to counterbalance economic and political forces from China and North America. On the other hand, Latin America is a promising market for Korea for its large consumer market and natural resources. In order to build a stronger foundation and synergy, the next step should be for both regions to engage in developmental projects and cultural diplomacy, as well as improve the existing architecture of trade and transactions. A balanced and multi-faceted economic, political and cultural strategy could lead to a successful and comprehensive relationship between Korea and Latin America.

Sarah K. Yun is the Director of Public Affairs and Regional Issues for the Korea Economic Institute. The views expressed here are her own.

Photo from Janice Waltzer’s photostream on flickr Creative Commons.

By Troy Stangarone

The anniversary of China’s formal entry in to the WTO ten years ago this week comes as a mixed blessing for many of its trading partners. China’s entry into the WTO brought the world’s most populous nation into the rules based trading system that is the WTO and created new economic opportunities for all involved. The move paid off handsomely for China as it became the world’s second largest economy and largest trading nation, reshaping global commerce at the same time.  For China’s trading partners the perspective is often different. Concerns continue to exist over China flooding markets with cheap goods and undervaluing its currency to the detriment of its trading partners, among other issues. One exception to this has been Korea, which despite the challenges others often see in exporting to the Chinese market has seen its own trade surplus with China grow significantly over the last decade.

That China has a trade surplus is not new. When China joined the WTO, its trade surplus was already $22 billion, but its surplus with the rest of the world has grown significantly in the intervening years. In 2010, China’s trade surplus with the rest of the world stood at $181 billion. However, the high water mark for China’s trade surplus came in at $298 billion in 2008 before the financial crisis took hold.

While countries such as the United States have seen their trade deficits with China widen over the last decade, Korea has seen its trade surplus with China grow from $2.9 billion in 2001 to $39.3 billion last year. Korea’s exports to China have grown from $10.4 billion in 2001 to $111.3 billion in 2010, or about $19.4 billion more than the United States. Since Korea and China did not have formal relations until 1992, this growth has really only come together in the last two decades.

Korea’s Exports and Imports with China

Source: Korea International Trade Association, Billions U.S. Dollars

Surprisingly, there has been little change in the composition of Korea’s exports to China. If one were to scan Korea’s top five exports to China in 2001, they would see many that are there today such as electronics, machinery, plastics, and organic chemicals. The only change has been a significant growth in liquid crystal and optical devices, but this also reflects a shift in the last decade in electronics, so does not come as much of a surprise. The composition of China’s trade with Korea remains fairly stable as well, with the exception of items of apparel being replaced with imports of Chinese steel and iron products.

While the composition of Korea’s trade with China may not have changed much in the last decade, the direction of Korea’s trade has changed over the last decade. In 2001, Korea’s trade with China was slightly less than with the European Union, which trailed both the United States and Japan in terms of trade with Korea. Today, the numbers aren’t even close. While Korea’s trade with the United States, Japan, and the European Union has continued to increase, trade with China has grown more than six fold to $188.7 in total trade. Put another way, Korea’s total trade with China is nearly the same as its combined trade with the United States and Japan. It appears as though a permanent shift in Korea’s trade has taken place in a relatively short period of time. And though the KORUS FTA should help boost trade between the United States and Korea, it seems unlikely that the United States will regain its lead anytime soon.

Korea’s Top Four Trade Partners

Source: Korea International Trade Association, Thousands U.S. Dollars

Over the last decade, Korea has successfully taken advantage of China’s continued integration into the global economy. While other nations have also benefited from China’s continued integration into global markets, perhaps few have to the degree of Korea. Korea initially utilized the Chinese market as an export platform to the United States and Europe, but overtime has begun to take advantage of opportunities in China’s own domestic market as well, with Korea’s share of trade with China for its domestic market hitting 50 percent in 2005. Over the long-term, the question for Korea will be whether it can continue to expand in China’s domestic market, while still using China as an export platform, or will China’s recent trends towards a more state driven, protectionist model of trade over time begin to undermine Korea’s success within China and begin to reverse the trade surplus Korea currently holds?

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute. The views expressed here are his own.

Photo by SF Brit

By Troy Stangarone

For the first time this year, Korea has surpassed the $1 trillion mark in annual trade volume, making it just one of nine nations to do so. This milestone comes after years of intensive export lead growth that have transformed Korea from one of the poorest nations in the world into a modern, developed economy. While Korea has been wildly successful in developing as an exporting powerhouse, it also faces challenges in the years ahead to economic growth from demographic trends and an under developed services industry that increased exports are unlikely to resolve.

Before beginning its industrial drive in 1962, Korea was still one of the poorest countries in the world. In 1961, Korea had a total trade volume of $357 million, while exporting a mere $40 million. A half century later, Korea has crossed the $1 trillion threshold in total trade and is expected to export $557 billion in goods this year and pass the $600 billion mark next year.

                                 Source: Korea International Trade Association, Millions U.S. Dollars

Perhaps most remarkable is that Korea continued to expand its trade volume despite the global economic difficulties of recent years. Korea first passed the $500 billion mark in trade volume in 2005, and yet was still able to double its trade volume in six years despite the global financial crisis of 2008 and the economic slowdown this year from the increasing uncertainty related to European sovereign debt.

However, despite the impressive nature of this feat, Korea faces challenges ahead as it seeks to continue to expand its economy and reach the $2 trillion threshold. While Korea has always been dependent upon trade for economic growth, it has become more so in recent years and the returns to job growth Korea earns on that trade have been diminishing over time.

In the last two decades, Korea’s trade has grown from just over 50 percent of GDP to nearly 90 percent of GDP. In contrast, for developed nations such as the United States and Japan, trade represents only 18.7 and 22.3 percent of GDP respectively. Even for a developing nation like China, trade is only 45 percent of GDP.  At these levels Korea may be pushing the outer limits of export lead growth, while becoming highly dependent on continued economic growth abroad for growth at home. At the same time, each billion won in increased exports is creating fewer jobs than just a decade ago, having fallen from 15.3 jobs in 2000 to 9.4 in 2008.

While Korea has continued to successfully expand exports, continued export growth will not address all of the challenges Korea will face in the future either from increased international competition or domestic factors such as demographic decline and an underdeveloped services industry.

Korea’s population has already begun to age and is expected to peak in 2033 at 52 million and then decline to 44 million by 2060. At the same time, Korea’s population is rapidly aging. In 2000, the share of Korea’s population over the age of 65 stood at 7 percent. By the middle of the 2020s that share will surpass 20 percent. In the coming years Korea will need to increase the share of government expenditures and employment in the healthcare industry to accommodate its aging population. As Korea’s population ages and declines, the labor force is expected to peak at the beginning of the next decade and then decline by 24 percent by 2050, at which point the projected share of the elderly in Korea will be approaching 38 percent.

However, Korea may be able to partially address its expected labor force decline by encouraging more women to take part in the labor force and adjusting its pension system to reduce the current incentives that currently lead to early retirements. Among OECD nations, Korea has one of the lowest levels of participation by women in the workforce at 53 percent. Because many women are employed as non-regular workers, the average salary for women is just over half the average salary of men, further discouraging participation.  If Korea were able to increase the participation of women in the workforce, this could help mitigate part of the expected decline in the overall workforce.

At the same time, the weak point in the Korean economy has long been the services sector. This partially stems from Korea’s initial focus on manufacturing exports, but productivity in the services sector has consistently lagged that of the manufacturing sector. In 2009, the Ministry of Strategy and Finance indicated that the productivity of the services sector was only 58 percent of Korea’s manufacturing sector and 44 percent of the U.S. services sector. Improving productivity in the services sector would have the benefit of helping to increase domestic demand and help to boost employment.

Given the success that Korea has had as a trading nation, it will likely reach the $2 trillion mark in trade volume in the coming years. However, the long-term well being of the Korean economy will also depend on its ability to address challenges in the services sector and the demographic changes that will be coming in the decades ahead.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

Image by Zampano.