U. S. - South Korea relation can be traced back to the days of the Korean War (1950-1953) when U.S. played a pivotal role in establishing and giving economic and political support to South Korea. Since then, South Korea has grown and matured substantially and reduced her dependence upon the United States. Bilateral foreign trade between the two countries has been dominated by United States which became the largest trading partner of South Korea. The relation also witnessed ups and downs with changes in the South Korean political arena. Dictatorship of the ruling party gave way to the United Democratic Front in 1998. UDP had its own political stances which were widely different from that of the earlier government. This period saw South Korea steering away from U.S. Consequently, trading and economic activities suffered, leading to occasional frictions between the two countries. Perceived threat from North Korean military regime saw the presence of Combined Forces Command (CFC) with its base in Seoul and an U.S. general as its head. As South Korea prospered further and successive UDP government tried to ease relation with North Korea (sunshine policy), CFC was seen as a hurdle for independent military, economic growth and participation in world trade by South Korea. In the backdrop of these events U. S. and South Korea signed the Free Trade Accord in June 2007. This is the largest trade deal agreed by U.S. after NAFTA (North American Free Trade Agreement) in 1994. The deal primarily aims to eliminate about 95% of all tariffs within three years of implementation. Bilateral commodity trade, which was $ 61.38 billion in 2007, is expected to grow by 20 percent once the deal is fully implemented. In 2007, conservative Grand National Party, led by Lee Myung-bak won the Presidency followed by wining the parliamentary election in 2008. Lee is a strong supporter of FTA unlike his UDP counterparts. With the implementation of the deal, doing business with South Korea will be further eased and American exporters and U.S. manufacturers would largely be benefited.
Areas of Business Interests
U.S. Exports and Investments
South Korea, whose consumption needs were once largely dependent upon U.S. exporters, has transformed itself into one of the largest industrialized and developed nations in the world. Exports from U.S. manufacturers were dominated by semiconductor chips and manufacturing equipments, aircraft, corn and wheat, plastics, steel, and rice. South Korea is also a leading market for American exporters of agricultural products and beef. The country is the seventh largest trading partner of U.S. in terms of total trade. In the early 90’s when South Korea implemented some radical economic reform programs to open up its economy, U.S. took the leading role in pumping in billions of dollars both as Foreign Direct Investment (which is highest) and foreign portfolio investment. In this process various U.S. firms now own significant shares in prominent industrial conglomerates in South Korea. It has been estimated that one-third of the South Korean banking industry is owned by foreigners led by U.S.
South Korean exports and industry
Main industries of South Korea are electronics, automobile production, chemicals, shipbuilding, steel, textiles, apparel and food processing. United States is second largest importer from South Korea with 12.5 percent of the total import. South Korean manufacturers mainly exports cell phone, semiconductor, circuit television and flat panel screens, computer parts, construction vehicle, and small cars. The “National IT Project “ implemented by the Government of South Korea to boost up the production of IT related products, proved to be a stunner. South Korea positioned itself as the world leader in semiconductors (common examples are RAM and Flash memory), plasma panels and consumer electronics and dominates the global trade of these items. South Korea became the most connected country in the world with most wired and wireless connection coupled with 100Mbit/sec high speed internet connection supported by 4G technology. World Bank has recognized it as one of the developed nations and United Nation rate it as a prosperous economy. In view of this it is not unusual that U.S. has serious interest in doing business with South Korea.
Areas of Dispute
However there are areas of disputes between the two countries which need to be addressed. Regulatory Systems in South Korea lacks transparency, according to the U.S. exporters. It has also been alleged by the U.S. exporters, that government regulations are skewed to discriminate against American manufacturers. United States is also unhappy with the slow pace of reforms in opening up of agricultural market. A number of tariff and non-tariff barriers are particularly slowing down the agricultural exports of U.S. As FTA proposes to nearly abolish tariffs (almost 95%) U.S. agricultural export to South Korea is set to grow in leaps and bounds.
“Beef Ban” and rice remain two controversial issues for U.S. exporters. South Korea was a lucrative market for U.S. exporters of beef (third largest buyer) till 2003. In late 2003 a ban was imposed by the Korean government on import of beef from U.S. due to reported manifestation of “mad cow disease” among U.S. cattle. The ban was lifted partially in January 2006. Purchase, distribution and even the end use of imported rice is controlled by government of South Korea. It agreed to open its rice market to foreign exporters subject to a quota system for various rice exporting countries and to rationalize the tariff system. Later it decided to stick to the quota system albeit by increasing quota for exporters. U.S. is the number two exporter of rice to South Korea, next to China.
South Korean manufacturers of automobiles are highly in demand in the global market, and have taken the country among the top five automobile manufacturers in the world. South Koran manufacturers, led by Hyundai, have captured about 4 percent of the U.S. auto market whereas import from U.S. account only 3 percent of the Korean auto market. Considering the fact that market size of U.S. is larger than that of South Korea, the difference is substantial. This has been attributed to higher tax on the larger and luxury vehicles which are mainly imported from U.S. As the U.S. exporters of automobiles complained about higher tariffs (8%) in comparison to that of U.S. (2.5%), it may also be noted that South Korea is now allowing non-Korean companies including American manufacturers to operate in the country. General Motors has purchased ailing and bankrupt Daewoo Motor Company. On the other side Hyundai has opened a $ 1.1 billion plant in Alabama, U.S., which is expected to produce 300,000 vehicles per annum.
South Korea has a pharmaceutical market of $ 4 billion dominated mostly by domestic generic products. As such there are ample incidences of violation of IPR (Intellectual Property Right), which is a concern for U.S. in doing business with South Korea. It has been clearly stated by U.S. that in order to implement the FTA Korea must do away with such pharmaceutical policies that support generic drug manufacturing.
Since 1966 South Korea has been protecting its domestic film industry by mandating that every movie theater must screen domestic film for at least 40% of the calendar year. This issue was one of the main reasons for failure of Bilateral Investment Treaty (BIT) that was suspended in 1999. Once again this issue was surfaced when FTA talks were initiated and U.S. wanted it to be lifted for doing business with U.S. As a result, in January 2006 South Korea partially modified the screen quota to 20% (73 days per annum).
It has been alleged that South Korea purchases U.S. dollar assets to artificially lower the value of Korean currency “Won” against U.S. dollar to help the South Korean exporters. Between 2001 and 2005, ‘Won’ appreciated considerably raising an alarm for South Korean manufacturers who heavily depend on imports of intermediate goods. However, intervention was slow and less pronounced than other Asian countries such as Japan and China. In July 2005 Korean Investment Corporation has been launched to manage a portion of the country’s foreign exchange reserves.
Telecommunication is another area where there are some major issues. South Korean government mandated the use of WIPI (wireless internet platform for interoperability), a new platform for downloading information from the internet, for all cell phone services. This would affect American exporters like Qualcom, whose equipments are used by leading Korean cell phone operators. U.S. intervention resulted in allowing cell phones to be compatible with other standards.
South Korean manufacturers of steel are among the leading steel exporters to U.S. with exports peaking during 1997, promoting it to top five sources of U.S. steel imports. In an attempt to safeguard the local steel industry U.S. imposed sanctions and anti-dumping cases against South Korea which were later challenged and won by South Korea. However since then South Korean exports of steel to U.S. have decreased considerably. South Korea has been critical of U.S. in cases of international trade disputes such as antidumping issues and tariffs thereof. It has alleged that these tariffs are time and again targeted and concentrated on handful of Korean products such as steel, semiconductor and telecom equipment.
US-Korea Trade Relations Conclusion
Trade relation between both the countries is of equal importance. While U.S.exporters and investors have strategic and financial interests, South Korea realizes the U.S. role in promoting it as a economic powerhouse of Asia in the arena of world trade. U.S. has seen through all the crisis, be it economic (in1997 and 2003) or political (Korean War) of South Korea and played an active role to help South Korea in overcoming them. Huge American investments in South Korea make U.S. cautious and proactive to any perceived threat to South Korea. The area is also a politically important region for U.S. with China, Russia, and Japan in the vicinity. In 2003 China surpassed U.S. as the largest trading partner of South Korea and in 2005 Japan replaced U.S. as second largest trading partner. Implementation of FTA and warm bilateral relation may begin a new era in U.S. - South Korea trade relation.