Revamping Korean Economy Through KORUS FTA
Last week, President Lee Myung-bak succeeded in his bridge-repairing trip to New York and Washington, D.C. After a decade of the south Korean government demonstrating ideologically based nationalism by more-or-less thumbing its nose at Korea's most (and least cynical) strategic ally, the new administration is returning to a more even keeled attitude about the U.S. The South Korean government now recognizes abusing its strongest card is not a good way to compete. And this trip was a good way to remind Americans how important Korea is to their economic well-being.
Korea is America's important $80 billion trading partner. In fact, Korea is America's seventh largest trading partner and the second largest when it comes to U.S. services exports. For American small- and medium-sized enterprises (SMEs) that account for almost 90 percent of all American exports to Korea, South Korea is their second fastest growing Asian market, with the average trade per SME approximating $500,000 in exports. So, while bridge repairs were being made by President Lee in Korea's self interests, many Americans could ultimately benefit from improved trade relations.
President Lee's affirmative approach to trade was demonstrated during the first couple of weeks of his presidency. At a joint session with the leading foreign chambers of commerce, the President demonstrated his business acumen by openly acknowledging that South Korea presented often uncompetitive challenges to the foreign community. Specifically, he recognized the unpredictability of policy at all levels; the high margin tax rates with a lack of transparency in government; and the difficulties created by labor unions with the general lack of labor flexibility. All of which, of course, was hardly news to the international business community. But it was extremely refreshing for a national leader to address these issues with such candor.
President Lee then promised his audience that he would launch task forces to address the above issues while seeking foreign business input. More impressive for many business people, President Lee promised to conduct annual progress assessments ― similar to how any competent business executive might run a large enterprise.
So, all of this to date has been positive. But the real challenge is successful passage of the Korea-U.S. free trade agreement (KORUS FTA). This FTA is critical for upgrading further trade between the two nations, but in some surprising ways. For example, as matters currently stand, overall Korean tariffs are roughly three times higher than those in America. So, today the Korean market is much more protected than America's. In general and in specific terms, one can say from a mercantilist perspective, Korea is giving up more than the U.S.
While Korean trade negotiators were able to protect their rice farmers, the proposed FTA will allow a wide array of U.S. produce and agricultural products immediate access or in phased 2-year or 5-year introductions to Korea's markets. Even the heavily protected Korean automobile manufacturers will face more competition as the discriminatory aspects of Korean taxation on engine size could soon disappear if the FTA passes. Still, the FTA may make only a relatively small dent on this part of the U.S. trade deficit given that in 2006 Korea sold 800,000 vehicles while the U.S. sold only 3,000 vehicles in Korea. And the ``Buy Korean'' nationalism will undoubtedly remain a marketing headache for foreign automobile manufacturers. But this is progress. While the U.S. trade deficit stands at roughly $13 billion, the deficit has dropped by more than a third of what it was in 2004 ― without an FTA. And, of course, even a fairly comprehensive FTA is not the alpha and omega of trade development. Other discussions will continue.
Another bright area of the proposed FTA is the opening of legal services. U.S. legal firms will be allowed to set up Korean branches soon after FTA ratification and then 3 or 5 years later will be allowed to hire Korean attorneys so as to practice Korean law. Somewhat surprising are the Korean lawyers who welcome foreign competition as a way to improve their overall market. But this is in line with the current Korean thinking.
So, given the above, today why are so many Korean business professionals, bureaucrats and politicians in favor of the KORUS FTA? It seems almost like yesterday when Seoul's streets were blocked by sometimes violent anti-FTA and even anti-American demonstrations. What has happened?
There has been no one single sentiment-changing event, but during the past couple of years, many Koreans have seen their nation slipping behind China and even Japan in terms of trade competitiveness. At the same time, new competitors have appeared from India, Vietnam and elsewhere.
Meanwhile, the nation's ruling politicians proved to be ineffective administrators while clinging to a weird leftist-nationalist set of dogma that proved to be counterproductive. The watershed was December's presidential election when the conservatives swept Lee Myung-bak into power. Earlier this month, the conservatives regained control of the National Assembly. Why did this happen?
Many Koreans are frustrated by what they view as South Korea's lost, past decade. This anxiety is motivating many people to try to put Korea back on course, even if it means making some upfront sacrifices. Though not as dramatic as common citizens donating gold jewelry to help their nation get through the past IMF crisis, a similar resolve seems to be in place. That is, many Koreans recognize they can no longer pretend to be a developing country when it suits them while bragging about being the world's 11th largest economy. This ultimately means some serious adjustments need to be made.
As Dr. Park Young-woo, president of the KCCI's Business Institute for Sustainable Development, recently told me, ``Korean companies may have a developed country's hardware, but many still use developing country software.'' What he meant was that while South Korea seems to be so leading edge in many visible ways, much of management thinking and processes are more rooted in the 1960s and 1970s than the 21st century. And he is not alone among Korean business leaders with this perspective.
To move up to the next level of international competitiveness, many Korean business leaders recognize that they need to take a ``cold shower'' by facing world-class competition in their domestic market to motivate their industries to toughen up so as to better compete internationally. Many Koreans recognize that too often their key industries are competing with products and services from developing countries. Once that may have been acceptable, but it does not bode well in the long term for any developed economy. Rather, Korea must learn how to better compete with upscale products and services in advanced marketplaces. That means upgrading internal processes and external marketing. And, as rough as the transition may be, Korea must open up its market to learn firsthand from its global competitors. The Americans, for example, faced a similar challenge from Japan in the 1980s ― and today the U.S. is considerably stronger in quality assurance, inventory control and logistics as a result.
Last Friday, South Korea finally reopened its market to almost all U.S. beef imports ― removing a political sticking point with many U.S. senators and Congress representatives balking at supporting the KORUS FTA. The U.S. presidential election makes for unfortunate timing for the various considered FTAs in Congress. But in the end, almost everyone could benefit from the free trade agreements. While no one has said change is easy and painless, in the case of the KORUS FTA, it is interesting to see the Koreans for once pushing harder for free trade ― even though they are likely to endure the most grief. Should the Americans drop the ball on this one, America's failure to ratify the FTA may well be taken as a slap in the face by many folks here ― and this time, the Koreans would be right.
Tom Coyner is president of Soft Landing Consulting (www.softlandingkorea.com), a sales-focused business development firm, and co-author of Mastering Korean Business: A Practical Guide.