Korea: A Case in Successful FTA Policy

Like much of Northeast Asia, South Korea is almost totally devoid of natural resources. Though this lack of resources indicates that the Republic of Korea (ROK) need to grow into one of the world’s premier trading states, the Asian financial crisis of the late 90s provided the leverage for a policy change towards economic diversification.

Korea’s largest import in 2014 was Crude Petroleum (17%) followed by a range of other raw materials. Interestingly, 8% of Korea’s $853 billion exports consisted of refined Petroleum – indicating their major exporters are not limited to technology and manufacturing, but an assortment of value-added services. Data compiled by the Organization of Economic Complexity at the Massachusetts Institute of Technology indicates that Korea is the 6th most economically diverse nation in the world, a ranking derived from country export data and parsed to find revealed comparative advantage (RCA) and diversity of exports, before finally indexing the countries.

Korea has done an excellent job leveraging itself in the Asian region. The Free Trade Agreement (FTA) with the US (KORUS), which came into effect in 2012, enabled Korea to compete with the growing economic might of China and the traditional economic power of Japan. On the other hand, China balances against the US’s hardline stance against North Korea. In essence, the ROK has positioned itself favorably with all the major powers in the Asia-Pacific region, maintaining positive diplomatic relations with all the major economic and military players. With the dearth of liberal leadership since 2007, the Sunshine policy of Kim Dae Jung and Roh Moo-hyun may no longer be in vogue, but regardless, it is evident that Korea played the game of economic statecraft masterfully.

On the domestic front, there were also large measures of success. Kim Dae Jung, or DJ as he was affectionately known, was the first liberal president and in power from 1998-2003, Though some analysts believe he chose to burnish his international reputation for his run for the Nobel Peace Prize (which he won in 2000), his international gaze fell on more than just Oslo. To obtain financial assistance from the IMF, DJ took extreme measures to reform the South Korean economy after the 1997 Asian Financial Crisis. For example, he forced Chaebols to streamline their operations, rolled back lifetime employment, and focused on increasing exports. His actions, all done with the help of an extremely weak coalition in the National Assembly. His steps toward reform were rewarded with a $57 billion assistance package from the IMF. Other reforms, such as investment in creative industries, can be seen in the current so-called “Korean Wave”. His successor, Roh Moo-hyun (2003-2007) saw the early successes that DJ had and steadily forged more FTAs. Korea has rapidly expanded its exports and imports, quickly climbing the list of largest trading economies. Though 2014 data shows a strong positive current account balance of $75 billion, imports have stayed closely correlated to exports. This shows that, when done correctly, FTAs should create balanced economies. Even with near-total abolishment of tariffs on US imports (rice being the sole good protected) the trade balance still remained steady. Though not as flashy as the 6.3% GDP growth rate for China, the Republic of Korea is estimated to grow by a reasonable 2.8% in 2017 by the Asian Development Bank.

Kim Dae-June Keynote Address by Gen Kanai
Former South Korean president Kim Dae Jung. Kim Dae-Jung Keynote Address, Gen Kanai, Flickr Creative Commons

The European Union (EU)-Korea FTA, which took effect in July 2011, was the first EU-Asia FTA agreement to come into effect (EU-Singapore and EU-Vietnam agreements have since followed). This agreement is the second largest FTA in the world, second only to NAFTA. Korea wisely worked towards bilateral trade agreements while the market was hot, before populism took hold and doomed other Pacific-regional trade agreements, such as the Trans-Pacific Partnership (TPP). Late to the craze of signing FTAs (Korea signed its first FTA with Chile in 2004), they soon realized that there were huge gains to be had for all parties involved in the transactions – a lesson that will make every Econ 101 professor happy. Though slow to start signing FTAs, today Korea is one of the world leaders, when measured by the number of FTAs they have signed. The ubiquitous Korean phrase “Pali! Pali!”, which translates to something like “Quickly! Quickly!”, certainly appears to be the philosophy employed in signing FTAs.

However, certain industries end up losing from free trade. South Korea anticipated this; economic models which show certain sectors losing out from free trade, such as the Hecksher-Ohlin model, have been in use by economists for many decades. In order to combat these losses to specific domestic sectors, South Korea has adopted a panoply of compensatory measures for industries that suffer losses as a direct result of FTA implementation. Though measures are still evolving, just as international trade does, Korea has played the right hand to keep trade easy for their country’s exporters, and, more importantly, for the sectors that might face increased challenges. This is something that is looking increasingly difficult for US exports struggling to be heard above the loud domestic political environment. Had the US considered trade policy with a long-term perspective, even admitted that some sort of redistributive policy would be advantageous to many Americans, then perhaps the current backlash against international trade would never have happened. But, at least until the most recent election, those who supported free trade policies would never accept redistributive policies, and vice versa. Thus, even with large market-access potential for the service sector industries, the TPP and NAFTA became notorious in the US; however, the 2012 KORUS agreement never entered the negative political conversation. Even some labor unions supported the agreement, such as the United Autoworkers, because the agreement reduced Korean taxes on engine displacement, which hurt American manufacturers who produced larger automobiles. It should be expected that the political groups who stand to lose would scream the loudest. Therefore, if trade growth is something that is truly desirable, then domestic interests need to be balanced.

Doubtless, there are still long-term problems to be addressed in Korea’s economy, such as comparatively low GDP growth rates. However, access to foreign markets is certainly not on their list of concerns. Perhaps the lesson to be drawn from South Korea is that the US trade promoters should focus on the domestic concerns that free trade poses. Less platitudes about the benefits of trade and more long-term strategy at the domestic level. Instead of signing a deal and walking away to let a nebulous future self benefit from the increased wealth, why not make sure more people at home can benefit from trade? If manufacturing unions can applaud trade in one deal, why not others? If businesses need to build relationships, why not trade negotiators too?

The Korean trade negotiators might be saying “Pali! Pali!” but they are certainly moving forward with a critical approach.

Featured Image: Industry, v15ben, Flickr Creative Commons. 

15368792_10209288599705219_152877555_oAndrew Cech is a Master’s candidate at the Patterson School of Diplomacy and International Commerce, majoring in International Commerce and Economics. He is interested in East African politics, free trade agreements, and Chinese international development policies. He hopes to pursue a career in international trade facilitation with the US Department of Commerce or the US Department of Agriculture. 

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