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