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KWR Viewpoints

U.S.–ROK Economic Relations: Still Important?

By Caroline Cooper


President Roh Moo-hyun’s May visit to Washington produced limited results on economic issues. A joint statement was signed, which committed both governments to renew support for expanded trade and investment ties; however, no formal commitment was made by either country to do anything specific on economic issues, such as completing a bilateral investment treaty (BIT) or negotiating a free trade agreement (FTA). Upon his return from Washington, Deputy Prime Minister and Minister of Finance and Economy Kim Jin-pyo was reported as saying that the time has come for the two countries to complete a BIT. This would be a positive step forward; however, it may prove difficult to enact because rescinding the screen quota is a politically sensitive issue in Korea, just as protecting the domestic steel industry is here in the United States. President Roh currently has his hands full in trying to quell labor strife, mediate between North Korea and the United States, and get the economy back on track. Maintaining strong bilateral economic relations also remains a priority.

Lingering Disputes Need Resolutions

The United States and Korea continue to enjoy a very fruitful trade and investment relationship. According to industry statistics, the United States remains Korea’s single largest trading partner and second largest source of investment. Two-way trade totaled nearly $24 billion in the first five months of the year, according to the Korea International Trade Association (KITA). But new trends have emerged, which continue to influence the direction of Korea’s foreign economic policy. China, including Hong Kong, is now Korea’s largest export destination and Japan its largest source of imports. China is also Korea’s primary destination for investment. President Roh recently held a summit with Japan’s Prime Minister Koizumi in which the two leaders discussed expanding economic ties. Roh will meet next week with China’s leader to possibly do the same.

Upon President Roh’s entry into office, he committed to broad economic reforms, an encouraging sign to U.S. companies seeking to expand their business ties with Korea. But some companies now argue that the government is slow to fulfill these commitments, and they also remain frustrated with the lack of progress in resolving disputes in areas such as automobiles, pharmaceuticals, telecommunications, and intellectual property rights. Of particular concern are sectors such as agriculture, and the motion picture screen quota.

In its annual report to Congress on foreign trade barriers, the Office of the U.S. Trade Representative (USTR) also suggests that very little progress has been made to resolve other issues such as the auto trade imbalance. The deal completed last year by GM to acquire Daewoo and Hyundai Motor Company’s announcement that it will set up a plant in Alabama are positive steps to improve overall bilateral trade relations. However, these efforts have done little to improve business conditions for foreign auto producers that are seeking to enter Korea. The U.S. government has therefore urged that Korea reduce its 8 percent tariff and streamline the special auto consumption tax. Although the ROK government has indicated a willingness to consider the latter, it will not reduce any tariff in negotiations outside of those sanctioned by the World Trade Organization (WTO).

The U.S. government and pharmaceutical advocates like PhRMA continue to complain that doing business in Korea is difficult, in large part because of inequitable pricing policy for foreign producers. Companies have been most concerned in the past year about efforts by the Ministry of Health and Welfare to resolve the health care crisis by changing the regulations under which foreign drugs are reimbursed under the national insurance system.

For the moment, U.S. companies remain optimistic about President Roh’s engagement with the business community; however, this optimism is not likely to prove sustainable unless substantive progress is achieved on a range of important trade issues. Pharmaceutical producers, for example, are hopeful progress will soon be made to create an equitable reimbursement pricing policy in the bilateral health-care reform working group. Companies are seeking more intellectual property rights protection. The Motion Picture Association criticizes the increase in film piracy due to the limited power of the Media Review Board to verify movie copyrights. The U.S. government is concerned about a proposal by the Korean government to mandate one wireless telecommunications standard, called the wireless internet platform for interoperability (WIPI). However, attention to this issue has lessened in recent months in part because Sun Microsystems will be involved in the development of WIPI.

Korean Concerns

Bilateral trade disputes relate not only to “doing business in Korea” but also to doing business in the United States. Since 1998, Korean steel producers have been subject to many countervailing and antidumping duties and three safeguard actions—a number of which Korea has challenged in the WTO on procedural grounds and won. Politics has factored heavily into disputes associated with Korean companies doing business in the United States, especially relating to the steel and semiconductor industries. A case in point involves an ongoing investigation by the U.S. government into whether the Korean government has subsidized Hynix Semiconductor.

In 2001, Idaho-based Micron Technology alleged that Hynix was subsidized because the Korea Development Bank (partially government-owned) coordinated a scheme for underwriting the refinancing of its maturing bonds. The issue caught the attention of Idaho’s two Senators Craig and Crapo, who pressed the U.S. government to raise its concerns at the WTO. WTO action by the United States never went beyond the initial phase because Micron announced soon it would purchase Hynix. That deal fell through in mid-2002, and in November Micron filed a petition seeking a countervailing duty investigation of Hynix. The Commerce Department recently made a final decision in the case, recommending that duties be imposed on imports produced by Hynix to offset the estimated 45% subsidy rate. The U.S. International Trade Commission (ITC) will make its own decision in the case in mid-July. If the ITC finds that material injury was caused to Micron, duties will be imposed on August 7.

Next Steps

The latest government economic indicators reveal that Korea’s domestic economic situation is worsening. Domestic consumption and capital investment are down. Consumer debt is expanding and consumer sentiment remains weak, indicating that demand will not pick up any time soon. However, the current account balance reached $1.8 billion in May, thanks in large part to an expanding trade surplus, which preliminary statistics show reached $2.4 billion for June. According to MOCIE, this is “the largest surplus amount since December 1999.” This is good news, but more exporting opportunities will be needed to expand growth.

Korea needs to balance its trade interests. Industry experts such as Morgan Stanley’s Andy Xie, warn against Korea's overdependence on the Chinese market. Also, Korea remains fearful about expanding trade with Japan through an FTA, with concern that Japanese companies may undercut Korean firms. In the short-term, the U.S. market provides Korea with the best opportunity for export expansion. This fact should not be overlooked. The U.S. economy faces a bumpy road ahead, but the latest economic reports suggest it will improve in coming months. Korean companies would do well to continue expanding into the U.S. market, both through exports and investment. Korean products, especially consumer electronics, are highly competitive in the United States.

In the long-term, Korean companies might face greater obstacles in exporting goods to the United States. As the aggregate U.S. merchandise trade deficit grows, Korean producers will face even more scrutiny from domestic producers in sensitive industries who are fearful of increased competition. However, a more formal commitment by both governments to broaden trade and investment would go far to benefit companies in both countries. While an FTA may not be a realistic goal in the near term, completing a BIT is possible and something to which business groups in both countries agree is needed.

The U.S.–ROK economic relationship remains an important one for both countries. Neither should neglect the strength of their past half-century military alliance or their economic partnership. Maintaining strong bilateral economic relations, especially resolving lingering trade disputes, must remain a priority. Both countries have much to offer each other.

Caroline Cooper is the Director of Congressional Affairs and Trade Policy at the Korea Economic Institute (KEI) in Washington. The views expressed here are her own and not those of KEI or KWR International, Inc.



Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Sergei Blagov, Jonathan Lemco, Joseph Blalock, Jonathan Hopfner, Caroline Cooper and Robert Windorf



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