U.S. Waiting to See if S. Korea Delivers on Trade Promises

South Korea, the feisty economic tiger that fought off imports of luxury goods and allegedly defanged previous trade agreements with the United States last year, is once again purring about the need to open up to world trade.

But U.S. officials want more than words when they meet with South Korean trade negotiators in the next few weeks. U.S. Commerce Secretary Robert A. Mosbacher is set to visit Seoul on Friday and Saturday, while Korean negotiators will meet with officials from the U.S. Trade Representative’s Office in Washington on April 11.

U.S. officials contend that South Korea has been backtracking on promises to open its markets. As examples, they point to deals on imports of cigarettes, wine, pecans and beef that were negotiated more than a year ago but remained in dispute until new agreements in December and January.

U.S. officials are also displeased with Korea’s one-year delay in a five-year program to reduce tariffs and the nation’s position against full agricultural liberalization in the Uruguay Round of the multilateral trade negotiations.

Both sides say much progress has been made in the past few months, including the appointment of a more internationally minded trade minister. But U.S. officials are waiting to see whether South Korea will deliver on its promises.

“We are at the brink, basically,” a U.S. official said. “The change in tone and rhetoric is important and welcome. But what we’re really looking for is concrete, substantial action.”

Won Ho Lee, commercial attache with the South Korean Embassy, said that solutions have been found on a host of issues and that it will just take time to implement them. Other South Korean experts say the United States should be less demanding because South Korea’s economic foundation is still relatively weak and its heavy defense burden siphons off money that could be used for investment.

If South Korea fails to satisfy U.S. officials, it could find itself named as an unfair trader under the “Super 301” legislation that authorizes U.S. retaliation. Although trade disputes with South Korea may never reach the fever pitch of those with Japan--U.S. bilateral trade with Korea is just one-fourth as large as with Japan--they have drawn a fair amount of political attention.

“I think the Korean government realized our trade relations had deteriorated to the point where action needed to be taken or Congress was going to go after them in its (Super 301) review. They weren’t far from the truth,” a U.S. official said.

In the past five years, trade relations with South Korea had generally improved. Since the mid-1980s, South Korea has begun to dismantle its protectionist web of import bans and other restrictions.

The actions were prompted by pressure from the United States and other trading partners that the growing economic power had to begin acting like one. After all, the one-time “Hermit Kingdom” was now building ships, exporting cars and producing TVs and microwave ovens under prominent brand names like Goldstar and Hyundai.

South Korea is the United States’ seventh-largest trading partner. The nation’s gross national product has doubled since 1986, to $223 billion last year from $102.7 billion. Its growth rate hit double digits in 1986 and stayed there for three consecutive years. At its peak in 1988, the nation’s trade surplus ballooned to $11.4 billion.

But then the boom began to go bust. Escalating wage demands, a sharp appreciation of its currency and increased consumer spending all weakened the nation’s international competitiveness.

“When they sell overseas, their goods are 30% more expensive now. And they feel the increase in private consumption tends to cut down the amount of investment and savings in the economy,” said Robert Warne, president of the Korean Economic Institute, a research group funded by the South Korean government.

For the first time in five years, South Korea last year suddenly posted a trade deficit.

The result: panic.

“The Korean government responded by fostering a crisis atmosphere,” says a report released last week by the American Chamber of Commerce in Korea. “To cope with the ‘crisis,’ a new economic team was installed in March, 1990, and given a mandate to boost exports. As a result, bureaucrats reverted to . . . remnants of old attitudes regarding discriminatory treatment of imports.”

U.S. farmers, auto makers and tobacco companies say they are among the victims. In the most celebrated case, a South Korean campaign against luxury goods is blamed for drastically pushing down sales of Ford Motors’ Mercury Sable cars. Sales have plummeted from about 300 a month to 59, the American chamber reported.

South Korean officials say the campaign was meant to stem the growing class distinctions and conspicuous consumption overtaking society. But foreign business executives argue that it was aimed at shutting out imports.

Other bones of contention have been the nation’s alleged lack of compliance with deals to open its markets to foreign beef, cigarettes and wine.

For instance, even though the country agreed to allow foreign cigarettes, U.S. exporters say their ability to compete has been curtailed by restrictions on advertising and a local tax that they contend discriminates against imports. Although Korea agreed to increase beef imports and eliminate quotas entirely in 1997, U.S. meat exporters wanted greater ability to directly negotiate with hotels and restaurants. And the wine industry was displeased with a proposed Korean tax change that could have harmed imports.

“I don’t think anyone would question that the Koreans have dismantled their protectionist structures very rapidly,” an American chamber member in Seoul said. “But there are so many underlying restrictions that even if you eliminate one restriction, you have another one underneath.”

Most of the problems have been smoothed over by recent negotiations. But a host of issues continue to bedevil U.S. business executives: restrictions on import financing, protections for intellectual property and health standards that effectively keep foreign agriculture out.

For their part, the South Koreans say that political resistance from local farmers, who are one-fifth of the population, makes it difficult to wholeheartedly support open agricultural markets. And the tariff reduction program was delayed to offset a loss in revenue caused by abolition of a defense tax, said Korean commercial attache Lee.

Chae Jin Lee, a professor of government at Claremont McKenna College, said South Korea should not be expected to open its markets as quickly as other nations, such as Japan.

“Although South Korea has made spectacular economic achievement, one might say that the foundation of the South Korean economy is not that strong yet,” Lee said.

He also said differences in American and Korean culture have created misunderstandings and fueled a sense among Koreans that they are being scapegoated.

The United States has “a very legalistic and somewhat simplistic opinion: If we open our markets to another country, the other country should do the same for us,” Lee said. “But from a South Korean perspective, they think the U.S. is a sort of big brother. If the big brother comes to the small brother and exerts a great deal of pressure, they think that is unfair.”

SOCKING IT TO IMPORTS Hypothetical example showing how consumers in Korea pay much more for imported cars, after various taxes and other charges are added.

Cost factor Price (U.S. $) COST (includes insurance and freight) 15,000 Tariff (1990-91) 3,000 Special excise tax 4,500 Education tax on special excise tax 1,350 Banking and customs clearance fees 450 DISTRIBUTOR COST 24,300 Distribution mark-up 4,860 Value added tax 2,916 RETAIL PRICE, SHOWROOM FLOOR 32,076 Acquisition tax 642 Registration tax 1,925 Subway bonds 6,415 Miscellaneous charges 229 TOTAL CUSTOMER COST 41,287

Source: American Chamber of Commerce in Korea