By Andrew Kim
As East Asia establishes itself as a region of rising financial importance, the world is experiencing a newfound obsession with understanding the economic dynamics of countries such as Japan, China and South Korea. With Japan’s current position as the world’s second largest developed economy alongside China’s emergence as a global superpower, the Western world has largely ignored South Korea as an economic player. Yet the country’s economic rise within the past few decades is so remarkable that many refer to it as the “miracle on the Han River.” South Korea is the only country in the world to go from a net aid recipient to net aid donor of the Organization for Economic Cooperation and Development (OECD).
Now the world’s fourteenth largest economy, the country not only boasts a plethora of internationally recognized corporations—from Samsung to LG to Hyundai—but also has the seventh largest currency reserves worldwide(at an estimated $333 billion). With ever-increasing economic prominence, South Korea is a country that is well positioned to maximize growth from globalization. With this in mind, one of the most critical pieces of legislation regarding the economic future between the United States and South Korea is the Korea-U.S. Free Trade Agreement (KORUS FTA).
First ratified on June 30, 2007 and renewed in 2011, the KORUS FTA represents the United States’ most commercially significant free trade agreement in approximately two decades. The U.S. International Trade Commission estimates that the FTA will add between $10 and $12 billion to both U.S. and South Korean GDPs. Under the FTA, over 90 percent of bilateral trade in both consumer and industrial products will become duty free within the first five years of implementation. Many on both sides argue that the KORUS FTA will only serve to increase prosperity on both sides of the Pacific, and a look at the mere numbers would initially serve to strengthen that notion.
Yet a deeper analysis of the KORUS FTA presents a rather nuanced outlook for both countries, as numbers only reveal so much. As South Korea’s technological companies are globally competitive, a significant reduction in tariffs would lead to reductions in the overall price of goods within the domestic U.S. market. As Samsung currently has the largest global market share in the smartphone industry, a price reduction in their goods, when coupled with competitive mobile devices, such as Galaxy line, would only serve to negate rival company’s sales. While price reduction is good for the consumer, this would spell trouble for rival companies such as Apple that are currently fighting for every edge in a rather cutthroat market. The KORUS FTA, in this regard, can exacerbate the rise of South Korean conglomerates, which could inadvertently lead to sales losses for American tech companies domestically.
While the KORUS FTA does pose a danger to certain economic sectors, American companies such as Apple are still considered clear winners in terms of innovation. When assessing the impact of the FTA on South Korea, the country has much more to lose, especially in the long-term. A recent McKinsey report concluded that South Korea’s economy is significantly top-heavy, in the sense that the chaebols (South Korean family conglomerates) have too much of a political and economic sway. Samsung alone employs 20 percent of South Korea’s private sector, and when combined, the top 30 South Korean companies produce over 80 percent of the country’s GDP.
The FTA forces South Korea to place a dangerous overreliance on a few dozen companies, instead of helping spur growth for small and medium sized businesses. Moreover, as a physically small country, South Korea lacks the natural endowments needed to produce agriculture and sustain its people. With the price of a mango running up to $34 (you read it, one mango), the FTA will naturally allow U.S. agricultural companies to relatively dominate the playing field. If South Korea’s chaebols were to experience a decline for even a few quarters, this would spell trouble for the majority of the country’s private sector employees. This, coupled with a rise in inflation and agricultural goods (which are already freakishly expensive by normal U.S. estimates), could lead to legitimate suffering for many South Korean households.
For the short-term, both countries will significantly benefit from the FTA. As for the long-term, South Korea in particular needs to assess how to prepare for such fallout scenarios like the one fore mentioned. Imagine living in South Korea, finding out Samsung, LG and Hyundai aren’t doing as well for a few quarters, or even a few years, and having the price of a mango surge up to even $40 or $50 dollars.
Photo By United Nations Photo