Insights from Korea
The Beauty and Beastliness of Free Trade
With a vast network of free trade agreements, South Korea's trade volume has surpassed Taiwan's by leaps and bounds. Yet its society is polarized by a widening wealth gap. What lessons can Taiwan learn?
The Beauty and Beastliness of Free TradeBy Yi-Shan Chen, Shu-ren Koo
From CommonWealth Magazine (vol. 546 )
It is hard to tell when Taiwanese society began to project a complex mix of contradicting emotions onto South Korea. The Northeast Asian neighbor equally evokes admiring emulation, fierce competitiveness, unrestrained adulation and heartfelt hatred.
Can South Korea's wholehearted embrace of free trade be a panacea for Taiwan's economic woes?
What did South Korea gain from its FTA over the past decade? What did it lose?
Act 1: Admit It! South Korea Is a Free Trade Winner
Figures don't lie. No matter which figures we consider, South Korea has emerged as a winner in the global economy of the 21st century.
Since South Korea's FTA with Chile went into effect ten years ago, Seoul has signed ten more FTAs. Only Chile, Singapore and Mexico have concluded more free trade pacts.
As a result of these agreements, 39 percent of all South Korean imports and exports are tariff-free. This is far more than Taiwan's nine percent. Customs declaration forms in South Korea even feature an FTA column, because import duties on products from these countries are different from those imported from countries that are not FTA partners.
The South Koreans are known to harbor a strong nationalist spirit. Since the country does not boast a vast territory, the South Koreans like to show off the "economic territory" covered by its many FTAs as an indicator of the nation's economic clout. The countries to which South Korea can now export its products with zero tariffs, selling them at the same prices as at home, translates into a huge "domestic" market accounting for 57.3 percent of global GDP.
In terms of trade volume, South Korean has forcefully pulled away from Taiwan over the past ten years, taking a large lead. South Korean exports last year totaled US$559.6 billion, a 2.2-fold jump in one decade, far ahead of Taiwan.
On the surface, South Korea and Taiwan have similar trade surpluses. But a closer look reveals that Taiwan's import growth has been slow due to sluggish domestic investment, which has dragged down machinery and equipment imports. In contrast, South Korean exports have been booming, stimulating domestic investment and leading to increased imports of machinery and equipment. As import tariffs have fallen, imports of consumer goods have increased, which has led to an even faster increase in South Korea's import volume. As a result, the unemployment rate has been about one percentage point lower in South Korea than in Taiwan during the past decade, while annual per capita income hit the US$20,000 mark five years earlier than Taiwan.
"Globalization has made Korea totally different in the past ten years," notes Shim Jae-hoon, a veteran journalist who formerly reported from Taiwan for the Far Eastern Economic Review.
Times Square shopping mall in Yeongdeongpo District in the southwest of Seoul boasts luxury and designer brands from around the world, holding its own with other ostentatious shopping malls in Asia such as Roppongi Hills in Tokyo or Pacific Place in Hong Kong. On his days off, Shim often shops at U.S. warehouse retailer Costco, located not far away from Times Square. "On weekends, the place is so crowded you can't move," recounts Shim, who often buys American beef.
Act 2: Wait a Minute! The True Source of South Korea's Export Prowess
"Claiming that the increase in exports is entirely the work of FTAs – that's government nonsense," insists Joo Jae-joo, a section chief with the All-Korean Committee in Response to the TPP-FTA, an alliance of around 150 civic groups.
He cites a simple example to point out the logical fallacy in the statement. After the U.S.-Korea Free Trade Agreement went into force, semiconductors and automobile exports increased most. Semiconductors had enjoyed zero tariffs before, whereas Washington has not yet begun to lower tariffs on Korean automobile imports.
Empirical evidence shows that free trade pacts have most benefitted South Korean exports to emerging markets, while a final judgment regarding their effect on exports to advanced economies such as the European Union and the United States has yet to be reached.
In a report titled "Results of FTA for the Past 10 Years for Korea," the Korea International Trade Association (KITA) compared the effects of the country's existing eight FTAs. It found that the growth rate of trade with the Association of Southeast Asian Nations (ASEAN) and the United States slowed down after their respective FTAs went into effect.
Based on their import market share, South Korean products have been most successful in the Chilean and ASEAN markets. In the seven years since South Korea's FTA with ASEAN went into effect, the market share of South Korean goods in the ASEAN region rose by 2.2 percentage points to more than 8 percent.
In Chile, the market share of South Korean automobiles jumped from 12.4 percent to 30.6 percent of imported cars, becoming Chile's biggest source of foreign cars, followed by Japan and the United States.
Huang Yu-tsai, director of the Taiwan-based Food and Fertilizer Technology Center for the Asian and Pacific Region, offers an alternative explanation of why FTAs have boosted trade with emerging economies so effectively: "South Korean conglomerates all export branded end-user products. For consumers in emerging markets, the quality and price of these products is very attractive."
"The major reason for Korea's rapid export growth in the past ten years is the growing competitiveness of Korean conglomerates, like Samsung, Hyundai and LG," explains Kim June-dong, executive director of the Department of International Trade at the Korea Institute for International Economic Policy (KIEP).
Aside from the mobile phone and semiconductor industries, South Korea has internationally competitive industries such as shipbuilding, where it ranks second worldwide, and automobiles, where it is the global No. 5. These industries account for 75 percent of South Korean exports. The FTAs lowered export duties on such items.
In these industries, the ratio of companies whose operations remain firmly based in South Korea is much higher than in the electronics industry. The plants of semiconductor companies and the shipbuilding industry are virtually all still based in South Korea. Even in the automobile industry, 60 percent of production still takes place domestically.
The South Korean government spent a decade incubating a fashion industry to open up a future for the ailing apparel sector, a field that Taiwan gave up a long time ago. As a result, Korean design from Seoul's historic, yet trendy Dongdaemun District has been setting fashion trends in Taiwan, China's coastal provinces, Southeast Asia and even Russia.
While embracing free trade, the South Korean government has never taken a hands-off approach that leaves everything to market forces. Instead, it has taken a guiding role in industrial policy and invested massive resources in future industries. There is another thing that would be worthwhile for Taiwan to ponder. Virtually every interviewee we spoke to in South Korea stated frankly: FTAs are politics.
Act 3: That's it! FTAs Are Politics
Conducting interviews in South Korea, we discovered a very high consensus in Korean society that the resource-poor nation must rely on foreign trade for its affluence. Yet, can Taiwan simply replicate South Korea's FTA strategy? Most answers to this question were negative.
Jung Taik Hyun, vice chairman of the National Economic Advisory Council, a presidential advisory body, points out that South Korea was able to become an FTA hub because signing such agreements with other nations as a rather small country does not involve too much political sensitivities.
"If the United States had negotiated an FTA with Japan, when the WTO negotiations were stalled, it would have had huge political implications," notes Hyun. Big nations have the responsibility and obligation to maintain the international order; therefore, their every step is closely watched. In comparison, South Korea is not burdened with any liabilities.
South Korea's network of FTAs reflects a balance of power within the international economic and political environment.
Negotiations for the U.S.-Korea Free Trade Agreement were launched under President Roh Moo Hyun, the most staunch anti-American of all South Korean presidents. The most pro-American South Korean president Lee Myun Bak, for his part, was only willing to take a stance on the U.S.-proposed Trans-Pacific Partnership (TPP) agreement after China had signaled its "understanding" regarding South Korean participation.
"No one cares about Canada, Australia or even the EU. There is no demonstration against agreements with those countries. When you sign agreements with China, Japan and US, there are no questions on the benefits for the economy. But naturally people are concerned about security," remarks Choe Sang-hun, Seoul correspondent for the International Herald Tribune.
Each country has its own destiny. The power balance on the Korean Peninsula cannot easily be replicated in the Taiwan Strait. But South Korea's caution and time-consuming preparation when signing FTAs deserves contemplation on the part of Taiwan.
Jung Taik Hyun, who served at the presidential office under President Kim Dae Jung in 1998, recalls that FTA negotiations between Chile and South Korea took four years, including two years of parliamentary review. Moreover, the South Korean parliament also adopted a special law governing FTAs. South Korea launched FTA negotiations with its major trading partners the United States and the European Union after eight years of preparation.
Act 4: FTA Fever Cools Down – Enter President Park
Meanwhile, the fever over free trade pacts has abated in South Korea. While the future direction for trade negotiations remains undecided in Taiwan, South Korea has closed this chapter in domestic political debate. Today "economic democracy" is a hotly debated issue in public discourse, although the outcry over the April 16 ferry disaster that left nearly 200 dead has temporarily pushed the issue to the sidelines.
Hsia Guang-hwei, who grew up in South Korea and serves as advisor to the Taipei Mission in Korea, was most deeply impressed by South Korean president Park Geun-hye when she presided over a nationally televised meeting with regulators and businesses concerning deregulation March 20.
Park's most important election pledge was creating a level playing field between the chaebols (large conglomerates) and small companies, relaxing unnecessary laws and regulations that hamper business and making it easier to start new small and medium-sized enterprises (SMEs). Since taking office a year ago, Park has convened monthly ministerial meetings at the Blue House (the presidential office and residence), but the gatherings have so far failed to produce revolutionary new ideas.
In March, an exasperated Park decided to postpone the ministerial meeting for three days to directly invite SMEs to join. At the meeting bureaucrats directly talked with SME owners and managers. Park posed follow-up questions and mediated between the two sides. The entire process was broadcast live on national television. The open-ended meeting began at 2 p.m. and was scheduled to last until no more further questions were brought up.
At the beginning of the meeting, Park, known as the "Ice Princess" in South Korea's political arena, emphatically declared "I will personally track and handle all details of regulatory reform."
Eventually, the meeting adjourned after 8 p.m. A real-life drama played out right before the eyes of the entire nation as Park peppered tense officials with sharp follow-up questions and forceful decisions.
The meeting struck down a long-standing practice that requires online shoppers to provide their ID numbers before making a purchase. Park fumed over the bureaucrats' reluctance to do away with the rule, which prevented South Korean businesses from taking advantage of the e-commerce opportunities created by the South Korean romantic comedy drama series Man From the Stars, which is hugely popular in China. The meeting also decided to relax a ban on street carts selling snack foods.
"This is an approach that strikes home with ordinary people, directly making them feel that the government is willing to carry out reforms," observes Hsia.
"Striking a balance between big companies and SMEs is an issue that not only the president, but all politicians can't afford to ignore," says the National Economic Advisory Council's Jung Taik Hyun. "Taiwan envies Korea, but in this regard, Korea envies Taiwan."
The South Koreans most admire the strong entrepreneurial spirit of the Taiwanese, the many self-made millionaires who started out as traveling salespeople carrying their wares in a suitcase. Since only 15 percent of South Korea's SMEs export their products abroad, the vast majority of smaller companies depend on joining the supply chains of large corporations or offering local services. Therefore, trade liberalization has led to a rift in South Korean society between large and small enterprises.
Act 5: Rich against Poor! South Korea's Loathed Chaebols
The Taiwan of tomorrow hopes to catch up with the South Korea of today in order to reclaim a spot at the center of the world economy. But the South Korea of tomorrow hopes to get more of a Taiwan-style society with more wealth trickling down to ordinary people instead of large monopoly-like chaebols controlling all aspects of South Korean life.
What Park must deal with is a society in which even a ferry disaster can incite extreme resentment against large conglomerates and the cozy collusion between bureaucrats and industry.
Before the Asian financial crisis, the combined revenues of South Korea's Top 30 conglomerates accounted for 39 percent of the nation's GDP. By 2012, that figure had soared to 82 percent, which means these business groups are virtually in control of the entire country.
While the chaebols contribute shining export figures, they provide only 5 percent of all jobs in South Korea. Nonetheless, they keep branching out into industries and trades that are closely related to everyday life, a trend that directly affects 90 percent of Korean employees.
The South Koreans originally hoped that lower import duties would help stabilize consumer prices. But even government think tanks point to Chilean wine as evidence, frankly admitting that prices for imported goods have hardly come down at all. In South Korea salaries and wages are failing to keep pace with rising consumer prices, to an even more egregious extent than in Taiwan.
Although the unemployment rate is lower in South Korea than in Taiwan, Korean university graduates need to participate in 30 job interviews on average before they can land a job. As many as 33 percent of South Koreans are stuck with atypical employment such as part-time jobs, contract work or informal day labor. This compares to an average of 25 percent in member states of the Brussels-based Organization for Economic Cooperation and Development (OECD) and 6.94 percent in Taiwan.
The incomes of atypical workers stands at just 55 percent of those with a full-time job, and they receive insufficient social insurance, both signs of severe discrimination.
The suicide rate rose during the financial crisis, and has yet to come down again.
South Korean economist Chang Ha-joon, who currently teaches at the University of Cambridge, has denounced South Korean economic reforms as "a recipe for unhappiness" and urged other countries to refrain from following suit: "The sad tale of my country should serve as a salutary warning," he wrote in a newspaper column.
Act 6: Frozen in Time – the Shantytown of Guryong
The area around Seolleung subway station in Seoul's Gangnam District is where the wealthy reside, exclusive private schools cluster and multinationals place their corporate headquarters. Just half an hour's ride away is Seoul's largest slum, Guryong Village.
In 1988, the Seoul municipal government tore down a poor inner-city shantytown to give the city a facelift for the Olympic Summer Games, driving the poor out to Guryong at the edge of town. Today, Guryong is home to about 2,400 people who live in slum-like conditions.
"Pushing poverty under the carpet" is how Canadian photographer Mike Stulberg described the situation in a photo essay that documents the settlement sprawling beneath the imposing high-rise skyline of glitzy Gangnam.
"FTAs are the extreme of neoliberalism. It's sacrificing the rights of 99 percent of citizens for the benefit of the 1 percent," states Joo, the civic activist, with indignation. "The majority of people definitely had illusions about free trade, but ten years down the road, actual life has gotten much harder."
Jung Taik Hyun points to structural transformation as the root of the widening wealth gap. Globalization has definitely accelerated the pace of structural transformation and therefore shortened the adjustment period. Here lies the biggest challenge for South Korea today.
A ban on the exploitation of subcontractors by large corporations through unreasonable commercial terms and conditions is under way. Park also hopes to create new startup opportunities through deregulation.
Kim Joon-kyung, president of the Korea Development Institute, cites three key factors for the success of the new policy: "a new culture, strong leadership, and implementation." The institute currently helps Park develop an evaluation system for deregulation.
The intricate relationship between the government and the chaebols forced Park to call a nationally televised meeting to demonstrate her resolve. This shows just how difficult it is to carry out reforms.
This South Korean drama in six acts is the best lesson from which equally resource-poor, trade-dependent Taiwan would do well to learn.
Translated from the Chinese by Susanne Ganz