Nancy Linn Patton
ICAS Fall Symposium
Institute for Corean-American Studies, Inc.
965 Clover Court, Blue Bell, PA 19422
Nancy Linn Patton
Korea has been at the forefront of Asia's phenomenal economic growth and is a premiere example of what has happened in Asia in the last three decades. Korea presents American companies with enormous business opportunities and challenges. In 1996 Korea was America's fifth largest export market and its seventh largest trading partner worldwide. Few American's realize that that twice the number of exports flow to Korea than to China from the U.S. Although the U.S. enjoys a small trade surplus with Korea, bilateral trade has been and continues to be fairly balanced between the two countries.INTRODUCTION
It is indeed a pleasure to have the opportunity to speak on U.S.- Korea trade policy and promotion to such a distinguished audience. This is my first time in Chonju but my fourth visit to Korea to discuss U.S.-Korea bilateral trade issues. I would like to thank Governor Jong Keun Yoo for hosting this important symposium. Opportunities such as this are key to better understanding and cooperation between our two countries.
Before discussing with you U.S. bilateral trade policy issues, I would like to first identify the fundamental principles that drive U.S. trade policy. Then, I would like to give you a brief economic overview of the U.S. -Korea bilateral trade and investment relationship as a backdrop to a discussion on the challenges and opportunities of doing business in the Korean marketplace. Lastly, I would like to share with you an exciting new bilateral trade promotion and facilitation initiative that will be launched on October 1, 1997.
U.S. TRADE POLICY
U.S. trade policy is driven by two factors. The first is the emphasis on building prosperity at home through the expansion of trade opportunities built on a strong foundation of reciprocity. The second factor is ensuring that the U.S. is well positioned to promote economic, trade and broader interests, including regional stability, through enduring trade arrangements.
Given the competitive global trade environment and a wary U.S. Congress, it is often difficult to sell the need for an effective trade policy. Such a policy needs to encompass all key regions of the world. It needs to press for expanded global trade and liberalization while at the same time enforcing U.S. trade laws and agreements with vigor.
Over the next three and a half years, the Clinton Administration will be focused on multilateral trade agreements to open foreign markets and break down foreign trade barriers. The Information Technology Agreement (ITA) and the Agreement on Basic Telecommunications are excellent examples of how we all can benefit from important sectoral agreements. At the same time, the U.S. cannot fully confront the global competitive challenges or open major emerging markets around the world without a push on regional and bilateral fronts.
THE IMPORTANCE OF FAST TRACK
U.S. trade is now equivalent to nearly 30% of GDP, up from 13% in 1970. Exports over the last four years have generated approximately one quarter of U.S. economic growth, which is supported by jobs that pay 13-16% more than non trade-related jobs. These factors are compelling reasons why the U.S. needs to pursue global trade initiatives which are increasingly more important to its future economic security.
However, the U.S. is limited in its ability to pursue portions of its agenda with its existing tools. To realize the opportunities in the global economy, President Clinton is now seeking from the U.S. Congress a new grant of trade agreement implementing authority, commonly referred to as "fast track authority." On September 16th the President submitted legislation intended to expedite congressional consideration of trade agreements. The legislation stipulates that: (1) the Administration will closely consult with Congress throughout the trade negotiation process; (2) Congress will vote up or down without amendments and; (3) Congress will vote within a fixed period of time on implementing legislation.
President Clinton has identified three objectives in which to focus the proposed fast track legislation: (1) the WTO "built-in" agenda to include negotiations on government procurement in 1997, intellectual property rights in 1998, and trade in services in the year 2000; (2) a focus in key sectors for the future (such as ITA 2, chemicals, automobiles, oilseeds, energy equipment and services, environmental technology and services, medical equipment and services, and wood and paper products) and; (3) a push to meet APEC's trade liberalization goals for developed economies by the year 2010 and the Free Trade Area of the Americas (FTAA) agreement by 2005.
BILATERAL TRADE OVERVIEW
Keeping in mind the forces driving U.S. trade policy I would now like to turn to an examination of U.S.-Korea bilateral trade and investment before discussing economic policies and practices that present challenges as well as opportunities to doing business in Korea.
The U.S. regards Korea as one of its most important trading partners. U.S. exports to Korea throughout the 1980s grew annually at about 12.5 %. The U.S. served for many years as Korea's largest market, which enabled it to develop many of its industries to world-class levels. Today Korea is America's fifth largest export market and its seventh largest trading partner in total overall trade.
Unlike trade with Japan, our trade with Korea is fairly balanced. Last year two-way trade was about $50 billion. U.S. exports were approximately $27 billion, while imports were about $23 billion, leaving trade surplus with Korea totaling almost $4 billion. Despite an overall trade surplus, American companies find the Korean market very difficult to penetrate in many sectors. Consequently, the U.S. continues to press forward on market access issues with Korea.
Our economies are not only linked through trade but investment as well. Investment is no longer in one direction. Last year U.S. companies invested $4.5 billion in Korea while Korean companies invested $3.5 billion in the U.S.
The growing economic power of Korea's chaebols has enabled it to become a supplier of capital itself. This has allowed Korea to acquire foreign technology by purchasing stakes in American and foreign companies. The reach of Korean products spans the four corners of the world. Major conglomerates like Daewoo, Hyundai and Samsung are household names in markets around the globe. Investment by these and American businesses has created jobs and introduced new and advanced technologies in both countries which is an important component of our economic partnership.
Korea has in the last three decades grown into one of the most economically powerful countries internationally. This remarkable development has been based on state-supported heavy industry and the export of manufactured goods. As Korea seeks to move to the next level of industrialization, -- to join the U.S., Japan, Germany and others through the acquisition and development of advanced technologies, -- it should steadfastly embrace the policy of "globalization" or "segyehwa" to become more fully integrated into the world economy.
THE CHALLENGES OF DOING BUSINESS IN KOREA
In many respects, Korea has one of the most difficult business climates in the world. The majority of trade and investment barriers in Korea originate from outdated policies that were designed in the 1960s to encourage the growth of the country's major companies. Korea's current import policies are geared to encourage technology transfer and to limit imports to those products which feed Korea's export industries.
The most recent frugality campaign joins these trade policies. A slowing growth rate, growing trade deficit, as well as an increased current account deficit contributed to the emergence of another anti-consumption or frugality campaign this past year.
The U.S. does not have a problem with "frugality" in itself. However, the U.S. perceives these frugality campaigns as veiled anti-import campaigns, which negatively impact U.S. exports as well as exports of Korea's other trading partners. Recent measures taken in May by the Korean Government to counter the negative impact of the frugality campaign were welcomed gestures. Unfortunately, the residual affect that such campaigns leave is not easily erased.
Since the beginning of this year Korea has made substantial progress in overcoming several major trade issues with the U.S. in the area of telecommunications and intellectual property rights. However, in the key sector of automobiles the issue of leveling the playing field is now the focus of the U.S. government and the American automotive industry.
Last year Korea sold 1.6 million passenger cars in Korea. Of that number, only ten thousand or six tenths of 1% of the cars were imported and of that number, U.S. automakers sold only four thousand cars in the Korean market. In contrast, the U.S. imported 25% of its automobiles with 185 thousand automobiles coming from Korea.
Although foreign automobile imports into Korea have increased this year, foreign market penetration is still less than 1% -- a politically unsustainable level at a time when the Korean auto industry is aggressively expanding its exports abroad. Korea is the world's third largest automobile exporter and the fifth largest manufacturer. Its domestic automobile market is the fastest growing in Asia. The fact is -- the Korean automobile market remains essentially closed to imports.
In 1995, the United States and Korea signed an agreement to address automotive market access issues. Now the U.S. is seeking ways to move beyond that agreement, and to obtain real market access for American companies. This year the American Automobile Manufacturers Association petitioned the U.S. Trade Representative (USTR) to designate Korea as a "Priority Foreign Country" (PFC) under U.S. trade law known as Super 301.
The two previous rounds of bilateral auto negotiations in August and September yielded little in substantive progress. Korea has taken steps to improve automotive standards and testing, harmonize collection of auto import data, and address tax and tariff issues. However, actions to date have not convinced U.S. industry that Korea is committed to leveling the playing field for U.S. or foreign automobile imports.
This past week Korean and U.S. officials met in Washington to negotiate a mutually acceptable agreement prior to the September 30, 1997 Super 301 deadline determination date at which time USTR will decide Korea's status as a PFC.
Last year our bilateral trade relationship regarding telecommunications experienced a low point. In July 1996 the USTR identified Korea as a PFC under Section 1374 of the 1988 Omnibus Trade and Competitiveness Act for failure to address market access barriers to U.S. telecommunications products and services. Practices cited were government intervention in private sector procurement, lack of regulatory transparency and intellectual property rights (IPR) protection.
However, this year there is good news to report. On July 23, 1997 Ambassador Barshefsky announced that Korea had made important commitments, including the elimination of tariffs on information technology products, an increased in limitations on foreign ownership of domestic telecommunication service companies, and taken other steps which would promote competition and enhance transparency.
Taken as a whole, the U.S. believes that actions of the Korean Government over the last year should eliminate objectionable practices. As a result of Korea's commitments, effective August 11, 1997, the identification of Korea as a PFC was formally revoked.
Intellectual Property Rights (IPR)
With regard to IPR, there is more good news to report. In April of this year during the annual Special 301 IPR review, Korea was downgraded from "Priority Watch List" to "Watch List". Actions by Korea to improve its IPR environment included accession to the Bern Convention, significant efforts to reduce software end-user piracy, and improvement in IPR enforcement.
The U.S. is pleased with Korea's concerted efforts in these areas and will encourage Korea to continue to improve its IPR regime with a focus on full retroactivity of copyrights, enhanced protection of well-known trademarks, treatment of foreign pharmaceuticals, and technology based patents in the telecommunications sector.
CHALLENGES TO THE KOREAN ECONOMY
Korea is placing greater emphasis on high technology industries, and is seeking to encourage the growth of innovative small- and medium-sized businesses. The government also continues to encourage foreign investment and technology as an important means to achieve its development goals. However, the policy reforms needed to achieve these goals are slow to evolve. A number of financial and investment liberalization measures are being undertaken as a result of Korea's accession to the OECD. Unfortunately, the pace of reform has been seriously hampered by severe blows to its financial system in the wake of the recent insolvencies of two of Korea's major industrial leaders, Hanbo Steel and Kia Group.
In addition, the Korean economy is facing an increase in its current account deficit. Much of this can be traced to a reversal of Korea's terms of trade. For example, there has been a dramatic drop in the prices for its exports, especially semiconductors, while the prices of its imports, notably grains and petroleum products, have increased. As the Korean economy matures, we are seeing that cyclical downturns are being magnified by Korea's underlying structural problems, which include wage increases that have outpaced productivity and insufficient private investment in new technologies.
OPPORTUNITIES FOR BILATERAL TRADE AND INVESTMENT
Although the Korean economy is experiencing a temporary correction, there is much room for optimism. Last month at an economic ministers meeting the Deputy Prime Minister and Minister of Finance and Economy Kyong Shik Kang addressed measures to stabilize the domestic economy. He stated that the Korean government believes that its economy is fundamentally sound and recovering from the bottom of its cyclical downturn which is a view that the IMF also shares. Supporting macroeconomic indicators forecast that 1997 GDP growth will be over 6%, inflation 4.5%, and the current account deficit about 3% of GDP. These indicators mean that there will continue to be excellent trade and investment opportunities between American and Korean firms.
Moreover, Korea plans to invest more than $100 billion over the next three years to expand the country's infrastructure. Major projects that are planned include development of rail transportation, airports, power plants, defense, telecommunications, and environmental sectors.
In addition, there are ample opportunities for Americans to do business in Korea in the area of consumer product and services. Korean citizens are possessing increasingly larger amounts of disposable income, which create markets ripe for trade in consumer goods, consumer-oriented food products, and other retailing and franchising sectors.
There are vast opportunities for American companies in Korea. In turn, Korean enterprises are presented with vast opportunities to acquire new technologies through the establishment of strategic alliances with high tech American firms. Alliances such as these will assist Korea with its goal to achieve a higher level of economic development.
THE COMMITTEE FOR BUSINESS COOPERATION (CBC)
In an effort to further strengthen bilateral commercial ties and achieve the mutual goal of economic growth and stability, the Commerce Department and the Ministry of Trade signed a Memorandum of Understanding in December 1995 creating the U.S.-Korea Committee on Business Cooperation, or "CBC."
The CBC is a joint government-business forum designed to enhance commercial cooperation between U.S. and Korean businesses. It has been structured to address business development opportunities and improve the facilitation of trade and investment.
The inaugural meeting of the CBC, co-chaired by Trade Minister Lim and Commerce Secretary Daley, will take place in just two days in Washington, DC. We hope that this forum will create the opportunity to develop new and closer commercial relationships and expand trade opportunities between our two business communities.
The U.S. recognizes the importance of Korea as a major trading partner. Although significant trade issues still remain between our two countries, this year there has been significant progress in resolving key issues. On the eve of the inaugural meeting of the CBC the U.S. and Korea are entering into a new phase of their trade relationship -- one that promises to create a mutually beneficial commercial environment.
I believe that the fundamental principle of reciprocity that underlies U.S. trade policy will continue to apply to all U.S. trading partners and Korea. The idea that trade is a two-way street means that it is important that companies on both sides have the opportunity for the same level of market access.
Korea's long-term economic future will depend on its willingness and ability to implement economic and regulatory reforms. America's future economic growth and prosperity will depend on its economic engagement with Asia and regional leaders such as Korea.
Korea is a very important part of this Pacific community, and I know both sides will continue to work together to seize the opportunities while meeting the challenges of expanding a prosperous commercial relationship.