Professor Yoon Heo (GSIS, Sogang University) IEAS (Institute for East Asian Studies)

Date : 21 September 2011 Host : IIAS (Institute of International and Area Studies) Venue : K 508, Sogang Univ.

It is great honor for me to invite you to the IIAS International Seminar, which is hosted by the Institute of International and Area Studies at Sogang University since the fall of IIAS Seminar provides an excellent opportunity for current and upcoming scholars of international trade & development to open channels of communication, and for students to acquaint themselves with the latest academic information in the field of International area studies. In addition, the Seminar aims to advance the level of scholarship in international area Studies at home and abroad, where domestic and overseas scholars can interact and the latter can gain a deeper understanding of specific international affairs. It is open to all of you who are interested in International Area studies, and I hope that you will attend and actively participate. I am looking forward to seeing you at this years' Seminar. Sincerely yours, Yoon HEO Ph.D. Director, Institute of International Area Studies

⑪ K (Kim Daegon) Hall 508 Contact : Yun-mok Sohn, Coordinator, IIAS Tel : , Mobile :

Development Strategy in Korea: Lessons and Implications for Developing Countries IIAS Int’l Seminar on Trade and Development 21 Sep Professor Yoon HEO ( GSIS, Sogang Univ.)

Contents 1. Policy Changes in Korea 2. Korea's Multilateral Trade Policy 3. East Asian Regionalism 4. Korea's FTA Policy

Policy Changes in Korea Import Substitution Policy, Export Promotion Policy, Heavy and Chemical Industry Drive, Import Liberalization and Industrial Rationalization, Towards a Freer Trade Regime, present

Import Substitution Policy, Status - Rural peasant economy in poverty - Lacking in arable land and natural resources - Heavily depending on foreign aid-transfers (total 2.28 bill. U$, more than 10% of GDP) - Closed economy (exports 2% of GDP, 90% of exports were primary products)

Strategy 1. Target - non-durable consumer goods and their materials (flour, sugar, textile) 2. Key tools - High tariffs/quota restrictions - Prior approvals for imports - Multiple exchange rate system with overvalued foreign exchange rates - Regulated financial market with low interest policy Post-war reconstruction (completed in 1960: social overhead capital and productive capacity) Import Substitution Policy,

Performance - Failure. Why? Insufficient size of domestic market. (strong anti-export bias) Increased demand for foreign currency (continued dependence on imports for raw materials and capital goods) Import Substitution Policy,

Export Promotion Policy in the 1960s, Strategy 1. Target - labor-intensive manufactured products 2. Key tools - Export credit subsidies at preferential rates - Tax reduction, wastage allowances - Exemptions from import controls and tariffs for exporters - Retainment of foreign exchanges for imports - Export targeting, Presidential awards, Export Day (1964) - Export promotion meetings by the President( , every month)

Strategy 3. Institutional Infrastructure - Export Industry Complex (Guro, Seoul, 1964), Free Export Zones (Masan, 1970), KOTRA, KITA 4. Financial Sector - A sliding-peg system of unitary floating exchange rates - Currency devaluation - Nationalization of commercial banks - Establishment of specialized banks - High interest rate policy to induce high savings Export incentives were superimposed on protectionist measures Export Promotion Policy in the 1960s,

Performance - A dramatic change of economic structures (Agricultural → Manufacturing) Agricultural Products Fishery Products Mining Products Manufacturing Products Total100.0 Export Promotion Policy in the 1960s,

Export 1960: $41 million → 1970: $1,048 million 1 st Plan: nd Plan: rd Plan: th Plan: th Plan: th Plan: New Economy Plan: ( ) Economic Growth(%) Total Investment Rate(%) Foreign Debt ($100mill.) ,544.0 Trade ratio to GNP(%) BOP ($100mill.) Inflation (%) Source: Economic Planning Board: National Bureau of Statistics. Export Promotion Policy in the 1960s,

Total export (mill. USD)551,62421,58376,631162,471 Ratio to GNP *34.1* World market occupancy ratio e Export – composition ratio Primary Manufacturing (HCI)(10.4)(25.4)(52.8)(65.0)(83.2) (Light Industry)(89.6)(74.6)(47.2)(35.0)(16.8) Industrial Structure Primary Secondary (HCI)(28.6)(37.0)(44.9)(69.4)(76.4) (Light Industry)(71.4)(63.0)(55.1)(30.6)(23.6) Tertiary Korean Exports and Its Structure Source: Korea Trade Association, Korea Trade Yearly Bulletin: Bank of Korea, National Accounts: Bureau of Statistics. Major Korean Economic Indicators Export Promotion Policy in the 1960s,

HCI Drive in the 1970s, HCI Promotion Strategy - Climbing up the development ladder (shifting to capital-intensive from labor-intensive industries) 1. Targeted industries : steel, machinery, petrochemicals, shipbuilding, metals, electronics Why? - Structural trade deficit - Newly emerging competitors - National security concern - Protectionism abroad - Upgrading industrial structure

2. Key tools - Massive subsidized policy loans - Tax holidays and investment tax credits - Accelerated depreciation, consulting services - Government guarantee of foreign loans 3. Industrial Infrastructure - General Trading Company System(1975): Samsung, Daewoo, Hyundai, Ssangyong, Hyosung, Lucky Goldstar(LG), Sunkyung(SK), Koryo (for SMEs) - Role of GTC - 13 heavy and chemical industry complexes(1973) HCI Drive in the 1970s, mill. U$ in exports and over 10 overseas branches required. Important role in HRD Bringing in information and technologies Developing new markets

Performance Exports 1970: $1.05 billion 1980: $17.5 billion - Controversial but overall positive Problems - over-capacity - uprising inflation - distortion of resources, - corruptions, - increased foreign debt cf) Gov’t led? Export led? HCI Drive in the 1970s,

Example - LG, Samsung, Daewoo to invest in the electrical industries ( from Radio and TV assembling businesses) - Hyundai, Daewoo, Samsung in shipbuilding industries (from construction businesses) - LG and Samsung in petrochemical industries to provide new materials (from textile industries) Comprehensive Stabilization Program in 1979 (end of HCI)

Top 10 export countries (%) Rank country% % % % % 1U.S.47.3U.S.26.3U.S.29.8U.S.21.8China24.0 2Japan28.1Japan17.4Japan19.4Japan11.9U.S HongKong3.3SaudiArabia5.4HongKong5.8China10.7Japan6.0 4Germany3.3Germany5.0Germany4.4HongKong6.2HongKong5.5 5Canada2.3Hong Kong4.7Singapore2.8Taiwan4.7Taiwan3.8 6Netherlands1.6Iran3.5U.K.2.7Singapore3.3Germany3.6 7U.K.1.6U.K.3.3Canada2.7U.K.3.1Singapore2.6 8Vietnam1.5Indonesia2.1Taiwan1.9Germany3.0U.K.1.9 9Singapore1.3Netherlands2.0France1.7Malaysia2.0Indonesia1.7 10Sweden0.9Canada2.0Indonesia1.7Indonesia2.0Malaysia1.6 Total Source: KOTIS Towards a Freer Trade Regime, present

Top 10 export items (%) Rank (Jan. ~ Oct.) ItemShareItemShareItemShareItemShareItemShare 1Textiles40.8Garments16.0Garments11.7Semiconductor15.1Semiconductor11.1 2Plywood11.0SteelPlate- rolled product 5.4Semiconductor7.0Computer8.5Vessel10.8 3Wigs10.8Footwear5.2Footwear6.6Automobile7.7Petrochemical Products 7.7 4Iron ores5.9Vessel3.6Video Apparatus 5.6Petrochemical Products 5.3General Machinery 7.6 5Electronic goods 3.5Audio Apparatus 3.4Vessel4.4Vessel4.9Automobile7.4 6Confectionery2.3Man made Filament fabrics 3.2Computer3.9Wireless Telcom 4.6SteelPlate-rolled product 6.0 7Footwears2.1Rubber Products 2.9Audio Apparatus 3.8Synthetic Resin 2.9Wireless Telecom 5.7 8Tobaccos1.6Wood&Wood Items 2.8SteelPlate-rolled product 3.8SteelPlate- rolled product 2.8Parts of Automobile 4.0 9Iron products1.5Video Apparatus 2.6Man made Filament fabrics 3.6Garment2.7Electronic goods2.0 10Metal products1.5Semiconductor2.5Automobile3.0Video Apparatus 2.1Computer1.9 Total Source: KOTIS

Rank ExportImport articleamountchangearticleamountchange Total Sum4, Total Sum4, Vessel, Ocean structure and parts of Vessel Crude Oil Petroleum Products3768.9Semiconductor Wireless communication Apparatus Natural Gas Automobile3508.3Petroleum Products Semiconductor3287.8Steel Plate-rolled Products Flat display and sensor1874.4Coal Steel plate-rolled products1593.5Computer Synthetic Resin Alloyiron, Pigiron or Scrapiron Parts of Automobile1403.3Fine Chemical Material Computer1072.5Articles of Copper631.4 Top 10 trade items in Korea

($Bil.) Rank ExportImportTrade volume countryamountcountryamountcountryamount 1Germany1,465United States2,166United States3,467 2China1,428Germany1,206Germany2,671 3United States1,301China1,133China2,561 4Japan782Japan762Japan1,544 5Netherlands634France708France1,317 6France609United Kingdom632Netherlands1,208 7Italy540Netherlands574Italy1,096 8Begium477Italy556United Kingdom1,090 9Russian Fed.472Begium470Begium947 10United Kingdom458Korea435Canada874 11Canada456Canada418Korea857 12Korea422Spain402Russian Fed.764 Trade volume: 62nd (’64) → 11th (’08)  8 th (‘10) (‘2008)

Import Liberalization and Industrial Rationalization, Policies - Market opening (goods and services, FDI, financial markets) - Active participation in bilateral and multilateral trade negotiations - Abolished preferential lending rates - Privatized the commercial banks - Abolished numerous regulations - Promoted semiconductor industry - Enhanced skilled-labor intensive industries (machinery, electrical equipment, automobiles) Rationalization industries - fabrics, alloyed steel, automobile, diesel engines for ships, heavy electric equipments and fertilizers (limiting additional investment) Korea Export Insurance Corporation(1992)

Export volume 1980: $ 17.5 billion 1990: $ 65.0 billion 2000: $ billion 2009: $ billion Import Liberalization and Industrial Rationalization,

Towards a Freer Trade Regime, present Implementation of WTO commitments Active participation in the DDA negotiations The first FTA negotiation with Chile started (1999) FTA roadmap adopted (2003) East Asian integration initiatives proliferate Foreign Investment Promotion Act (1998) Abolishment of import diversification policy (1998) Indirect support for exporting sectors Further liberalization in finance, public, corporate sectors (1998)

Evaluation of Korean Experiences Positive Aspects - Rapid economic growth (GDP, Capital formation) - Remarkable export performance - Constant upgrading of the economic structure - Establishing competitive heavy industrial sectors - Establishing infrastructure for industrial development Negative Aspects - Price distortions by the government - Distortions in financial sectors (non-performing loans) - Excess capacity in some HCIs - Collusive relations between gov and business - Concentration of Chaebol’s economic power - High debt/equity ratios for Chaebols - Lack of foreign competition in domestic market - Nationalistic sentiments in the general public - Less focus on social welfare and environment protection programs (Labor rights strengthened since 1987)

Evaluations of Korean Experience (trade area) Exports concentration in selected industries Exports concentration in selected regions (China, US, Japan) Declining Terms of Trade (‘05=100, ‘08=78.5) Low Profitability Lower linkage between export sectors and domestic economy Growing trade deficit with Japan (‘  ’ bill. US$)

Lessons for Other Developing Countries Dynamics of comparative advantage in global markets An outward orientation with strong incentives for exports Sound macroeconomic policies Investment in human capital and R&D Competition in the domestic market R&D, global marketing, int'l exhibition, training trade specialists Synchronized efforts to upgrade the economic and trade structure Political stability and commitment from all levels Capacity building for the government Indirect institutional support for export promotion

Korea's Multilateral Trade Policy Overview: WTO/DDA Korea's Position on DDA

Overview: WTO/DDA Accession to the GATT in 1967 Implementing WTO commitments since 1995 Bringing domestic laws and regulations into conformity with WTO rules DDA(Doha Development Agenda) Negotiations: The 9th MTN since GATT and the 1st MTN since the WTO, present Key Agenda: Agriculture, Non-Agricultural Market Access, Service, Rules, Trade Facilitation, Trade and Development, TRIPS, Trade and Environment, and Dispute Settlement Understanding Korea supports the rule-based multilateral trading system of the WTO and has been playing an active role in DDA negotiations tabling over 100 submissions on various subjects

Korea's Position on DDA 1. Agriculture - Long-Term Goal - Establishment of a fair and market-oriented trade regime Korea's position - Gradual improvement of market access - Phasing-out of export subsidies - Gradual reduction of trade-distorting domestic subsidy - Flexibility for sensitive products - Non-trade concerns: food security, rural development and environmental protection

Korea's Position on DDA 2. Non-Agricultural Market Access (NAMA) - Comprehensive coverage with no prior exceptions - Supporting an ambitious tariff-cutting non-linear Swiss formula to address tariff peaks, high tariffs, tariff escalation - Sectoral zero-tariff initiatives should be an integral part of the negotiations with a "critical mass" approach - Substantial reduction of non-tariff barriers as set out in the Doha Declaration - Consideration of flexibility for fishery products

Korea's Position on DDA 3. Services High priority on infrastructure services (competitive areas) - such as telecommunications - distribution - maritime transportation - construction - and financial services Adjusting speed and scope of audio-visual, legal, and educational services (non-competitive areas) 1st offer (2003.3), 2nd offer(2005.5) - Enhancement of the overall economic competitiveness Expecting meaningful offers from a majority of WTO members

Korea's Position on DDA 4. Singapore Issues Anti-dumping: Subsidies: Regional Trade Agreements: to clarify and improve disciplines while preserving the basic, concepts, principles of the agreement, to reduce abuse of ADM, banning zeroing, improving review process, sunset clause, lesser duty rule clarification and improvement of Subsidies agreement necessary, fisheries subsidies important to developing countries limiting its application to resource- exhausting (environmentally damaging) subsidies interpreting the wording of these rules has proved controversial, clarifying and improving disciplines and procedures under the existing WTO provisions applying to regional trade agreements considering the developmental aspects of regional trade agreements, exemptions of trade remedy measures for member countries, preferential rule of origin

East Asian Regionalism Proliferation of FTAs: Trends Integration Scenarios Going Forward Korea's Options

Proliferation of FTAs: Trend 1 Move from closed regionalism to a more open model since Import substituting development with high external barriers in the 1960s and 1970s - New-wave RTAs are more outward looking and boosting not controlling int'l commerce in line with national economic policy From shallow to deep integration - FTAs becoming more comprehensive in the coverage of economic instruments and policies (FTA+: competition, tax harmonization, domestic subsidy, e-commerce and IT, HRD, development assistance)  See the next page - modalities of harmonization EU: single uniform, convergence, minimum standards, mutual recognition US-centered FTAs: cooperation between regulatory authorities

Proliferation of FTAs: Trend 1 FTAs cover Goods Tariffs and Non-Tariffs measures Rules of Origin Customs Clearance Procedures DSP and Other Areas Dispute Settlement procedures Other cooperation and review groups or committee Service Investment Regulations Standards, Government Procurement, Trade Remedy, Intellectual Property Rights, Environment, Labor

Proliferation of FTAs: Trend 2 Advent of North-South trade blocs - NAFTA in 1994, developed from Canada-US FTA, extended to include Mexico - EU with Eastern Europe, a CU with Turkey and arrangements with many Mediterranean nations, reciprocal trade arrangements with ACP countries The race to build spokes is now driving the trend Ex) EU, US, Mexico, Chile, Singapore, ASEAN With more spokes, the hub - Expands its free access market - Becomes more efficient and gets more investment - Increases political influence internationally as well as bargaining power vis-à-vis spokes

Proliferation of FTAs: Trend 3 Major Countries’ FTAs JapanUSChina Encourage/safeguard Japanese trade/investment interests in East Asia Avoid/redress discrimination caused by other pacts Shelter Japanese farm policies Mix of economic/foreign policy Export gains from trade/regulatory reform in agriculture, manufactures, and services Strengthen investment and IP protection Maintain US engagement in the region especially East Asia via TPP To secure its leadership in the Asian region To cope with increasing regional trade like the EU and NAFTA and discriminatory treatment to countries outside regions Strategy Effective Concluded Under negotiation ASEAN & 9 countries Mexico, Chile, Swiss Australia, GCC, Peru, TPP (?) NAFTA, Israel, Australia, Jordan, Singapore, Chile, Morocco, Bahrain, Oman, Peru, CAFTA-DR Columbia, Panama, Korea FTAA, SACU, Thailand, Malaysia, Ecuador, UAE Hong Kong, Macao (CEPA) Taiwan(ECFA) New Zealand, ASEAN, Pakistan, Chile, Singapore, Peru Australia, GCC, Iceland SACU, Norway, Costa Rica India

Proliferation of FTAs: Trend 3 Major Countries’ FTAs E UASEAN To simultaneously pursuing FTAs with multilateralism focusing on DDA To promote European regionalism accelerating economic integration and trade diversification To pursue an FTA hub in Asia by rapidly expanding FTAs To pursue FTA individually or collectively Strategy Effective Concluded Under negotiation EFTA, Turkey, Israel, Mexico, Chile, Egypt, Morroco, South Africa, etc Korea ASEAN, MERCOSUR, GCC, Canada, India, Columbia, Peru, Libia, AFTA, China, Japan, Korea, India(goods), Australia+New Zealand EU

Proliferation of FTAs: Trend 4 Problems - Negative effects on excluded economies - Proliferation increases cost of doing business due to divergent standards, tariffs, and ROOs - Hub and spokes create multi-layered preferences with complex effects: "spaghetti bowl" effect Benefits - When trade creation effect dominates, promotes trade liberalization - With each new FTA, domistic coalition for protection weakens

Integration Scenarios Going Forward Scenario 1  Consolidating ASEAN initiatives with China, Japan, Korea (10 + 3)  Make CJK(NEA) FTA → Link with ASEAN → EAFTA or  Link Existing Pacts (ASEAN + 1 and new ones) - Obstacles: political readblocks to a Japan-China pact, country readiness in China and Japan, differing levels of openness and market-orientation of the membership (especially India when we consider ASEAN + 6)

Integration Scenarios Going Forward Scenario 2  APEC implements the Bogor Goal vision  Free Trade Area of the Asia-Pacific - Obstacles: entrenched protectionism (e.g., agriculture), lack of reciprocity and free-rider problem, no political leadership

Integration Scenarios Going Forward Scenario 3  Trilateral agreement of US-Japan-Korea (Schott, 2007)  Consolidating US-Japan and Japan-Korea initiatives  US-Japan-Korea deal on manufactures/services following KORUS template  Separate bilateral farm deals a la NAFTA - Obstacles: agricultural barriers to a Korea-Japan and a US-Japan pact However, KORUS FTA and Korea-EU FTA would change the calculus of moving forward with a US-Japan FTA and reviving Korea-Japan FTA

Integration Scenarios Going Forward Scenario 4  TPP(Trans-Pacific Partnership); P4  Singapore, Chile, New Zealand, Brunai (effective since 2006)  US decide to participate TPP in 2008 to realize FTAAP  US ask Korea, Japan, Malaysia to join the discussions  P4 + US, Australia, Peru, Vietnam, Malaysia under negotiation Thailand, Canada and Japan shows interests in Nov Obstacles: strategic consideration, agricultural sector in Japan (leverage for domestic farm sector reform), different pay-off matrix for each member (FTA already concluded for most of them in case of Korea), US initiation too strong (wholesale reconfiguration in the region)

Korea's Options Participate in the race for spokes Contribute to APEC work toward Bogor Goals as well as to success of DDA round Most importantly, promote liberalization of agricultural policies at home, as part of rural restructuring and revitalization Focus East Asian regional cooperation on - Financial and monetary cooperation: AMF and AMU - OECD type of peer pressure exercises to modernize, harmonize, and globalize national standards and institutions - Work with ASEAN to provide the necessary leadership to steer cooperation

Korea's FTA Policy Future Plan and New Strategies Selection Criteria of FTA Partners (FTA Roadmap in 2003) Basic Strategies (FTA Roadmap in 2003) A Grand Shift to FTA, Why? Current Status

Effective: Chile (April 2004), Singapore (March 2006), EFTA (Sep. 2006), ASEAN (June 2007, Goods; Services, Investment, 2009), India(2010), EU(July 2011) Ended Negotiation: U.S. (June 2007, signed, Dec. 2010, renegotiated), Peru(Nov. 2010) Under Negotiation: Canada, Mexico, Australia, New Zealand, GCC, Colombia, Turkey Stopped Negotiation: Japan (Nov. 2004) Preliminary Consultation and Joint Study: China, MERCOSUR, GCC Under Consideration: MERCOSUR, SACU, Russia, Vietnam, Israel, Japan, China, CJK

Current Status Coverage of FTAs ClassificationKorea-ChileKorea-SingaporeKORUSKorea-ASEAN Goods OOOO Services O (excluding Finance) OOO Investment OOOO Government Procurement OOOX Competition OOOX Intellectual Property Right OOOX Transparency OOOX Dispute Settlement OOOX Electronic Commerce XOOX SPS / TBT OOOO Cooperation XOXO Source: KITA

Current Status Tariff Concessions (Goods) FTAsNations Overall (fishery and forestry included) Manufacturers Agricultural product Korea-Chile Korea Total: 96.4 immediate: 87.2 Total: 100 immediate: 99.9 Total: 71.2 immediate: 15.6 Chile Total: 99.0 immediate: 41.8 Total: 99.8 immediate: 30.6 Total: 94.2 immediate: 92.9 Korea- Singapore Korea Total: 91.6 immediate: 59.7 Total: 97.4 immediate: 68.8 Total: 66.6 immediate: 16.0 Singapore Immediate elimination on all the goods traded (100%) Korea-US Korea Total: 99.7 immediate: 80.4 Total: 100 immediate: 91.6 Total: 98 immediate: 38.1 U.S. Total: 100 immediate: 82.1 Total: 100 immediate: 87.7 Total: 100 immediate: 58.7 (Unit:%) Source: KITA(2007)

A Grand Shift to FTA, Why? Accelerate domestic economic reforms to increase productivity/growth - TFP declining since 1980s, low birth rates with aging population, facility investment↓ since 2001, backward service sector Reduce barriers to manufactured exports - Securing overseas market is a key factor to success Induce FDI and promote development of North East Asia economic hub - Inviting needed foreign capital and advanced technology, share of intra-regional trade increases (55%) Reinforce strategic alliance with key partners - to contribute to the political stabilization of the peninsula

A Grand Shift to FTA, Why? Low productivity and inefficiency in the growing service sector Comparison of Korea’s Service Sector with Advanced nations (Unit:%) Source: KIEP(2006) KoreaU.S.Japan Share of Service Sector in GDP(2005) Productivity in Service Sector(2002)

A Grand Shift to FTA, Why? Declining growth rates of total factor productivity (TFP) since 1980s Trend of Korea’s Growth Rates of TFP (Unit:%) Source: KIEP(2006) Years Growth Rates of TFP

Basic Strategies (FTA Roadmap in 2003) Multi-track approach with simultaneous negotiations Comprehensive FTAs in terms of substance Public consensus building on trade liberalization

Selection Criteria of FTA Partners (FTA Roadmap in 2003) Economic Benefits Cooperation in security and foreign policy Country readiness: Countries active to have FTA with Korea From regional periphery to core advanced countries Sequencing Short-term: Japan, Singapore, ASEAN, EFTA, Mexico, Canada, India Mid & long-term: U.S., EU, China, MERCOSUR, NEAFTA Other countries: GCC, Russia, Australia, New Zealand, Peru, Israel, Morocco, Algeria, SACU

Future Plan and New Strategies A New FTA Roadmap (with new selection criteria) - Representativeness in the region - Possibility of cooperation in resource development - Compatibility with Korean interests in security and diplomacy - Economic impacts - Country readiness

Future Plan and New Strategies New Strategies - From core countries to periphery: sequencing - Systematic approach to domestic negotiations: consensus building, governance, institutional infrastructure - Exploration of cooperation in resource development: mid & long term objectives - Holistic approach with security and diplomacy factors considered: geopolitical factors - Effective restructuring of agricultural sector - Further liberalization of service sector

Levels of Linkage among FTAs: (Low – Mid – High Level) Copyright by CHOI Won-Mog60

Long-Term FTA Strategy of Korea Copyright by HEO Yoon & CHOI Won-Mog61