South Korea-U.S. economic relations: cooperation, friction, and future prospects.

Summary

South Korea is a major economic partner for the United States. Korea is the U.S.'s seventh-largest trading partner--ahead of Western European countries such as France and Italy--and its sixth-largest export market. Korea has also become a significant investment site for American companies, which have poured nearly $20 billion into the country over the past seven years. In 2003, the U.S. was Korea's largest trading partner, and its second-largest export market, source of imports, and supplier of foreign direct investment (FDI).

Increased economic interaction has been accompanied by numerous disagreements over trade policies. The intensity of the disputes has diminished considerably since the late 1980s and early 1990s, in part because South Korea has enacted a set of sweeping market-oriented reforms as a quid pro quo for receiving a $58 billion package from the International Monetary Fund (IMF) following the near collapse of the South Korean economy in 1997. In recent years, the United States and South Korea appear to have become more adept at managing their trade disputes, so that they tend to be less acrimonious than they were in the 1980s and 1990s. This is due in part to the quarterly, working-level bilateral trade meetings that were first held in early 2001.

This report summarizes the main issues in U.S.-South Korean economic relations, including South Korea's economic prospects and economic reforms, and major bilateral economic disputes. The report will be updated periodically.

**********

The United States and South Korea (known formally as the Republic of Korea, or ROK) have been allies since the United States intervened in 1950 and fought the Korean War to prevent a North Korean invasion from taking over South Korea. Over 33,000 U.S. troops were killed and over 100,000 were wounded during the three-year conflict. In 1954, a year after the parties to the conflict signed an armistice agreement, the United States and South Korea signed a Mutual Defense Treaty, which provides that if either party is attacked by a third country, the other party will act to meet the common danger. The United States maintains about 37,000 troops in the ROK to supplement the 650,000-strong South Korean armed forces.

Beginning in the 1960s, rapid economic growth in South Korea propelled it into the ranks of the world's largest industrialized countries. For over a decade, South Korea has been one of the United States' largest trading partners. Economic growth also has helped transform the ROK into a mid-level regional power that can influence U.S. policy in Northeast Asia, particularly the United States' approaches toward North Korea and China.

Overview of U.S.-South Korean Economic Relations

In 2003, trade between the South Korea and the United States was nearly $60 billion, making South Korea the United States' seventh-largest trading partner--ahead of France and Italy--and its seventh-largest export market. (See Table 2.) For some western states and U.S. sectors, the South Korean market is even more important, ranking number five for California's exporters, number two for Oregon's exporters, and number four for all U.S. agricultural exporters. Major U.S. exports to South Korea include semiconductors, machinery (particularly semiconductor production machinery), aircraft, agricultural products, and beef. South Korea is among United States' largest markets for agricultural products and beef.

South Korea is far more dependent economically on the United States than the United States is on South Korea. In 2003, the United States was Korea's number one trading partner, and its second-largest export market, source of imports, and supplier of foreign direct investment. In 2003, China for the first time displaced the United States from its perennial place as South Korea's number one export market.

Increased economic interaction has been accompanied by numerous disagreements over trade policies. The intensity of the disputes has diminished considerably since the late 1980s and early 1990s, in part because South Korea has enacted a set of sweeping market-oriented reforms as a quid pro quo for receiving a $58 billion package from the International Monetary Fund (IMF) following the near collapse of the South Korean economy in 1997. In particular, as a result of the reforms, South Korea has opened its doors to foreign investors, ushering in billions of dollars of foreign portfolio and foreign direct investment (FDI). The result is that foreign companies, including U.S. firms, now are significant shareholders in many prominent industrial conglomerates (chaebol), own an estimated 40% of the value of the shares traded on South Korea's stock exchange, and own about one-third of the Korean banking industry. South Korean President Roh Moo-hyun, elected to one five-year term in 2002, has said that more extensive reforms are needed to help accomplish his goals of raising per capita gross domestic product (GDP) to $20,000 and of transforming South Korea into an major economic hub in Northeast Asia.

The United States and South Korea appear to have become more adept at managing their trade disputes, so that they tend to be less acrimonious than they were in the 1980s and 1990s. This may be partly due to the quarterly, working-level "trade action agenda" trade meetings that were first initiated in early 2001. Both sides credit the meetings, which appear to be unique to the U.S.-South Korean trade relationship, with creating a more constructive dialogue by serving as "action-forcing" events. The most recent meeting occurred in early June 2004.

South Korea's Economy

The 1997 Crisis and IMF-Directed Reforms

South Korea's 1997 financial crisis was a seminal event in the country's history. During the autumn of 1997--spurred in part by the bankruptcy of some major industrial conglomerates (chaebol) and a sharp increase in repayments required on short-term foreign debt--investors lost confidence in the economy and capital fled the country. The Korean won lost half its value in the space of a few days, tumbling from 900 to 1900 won to the dollar. In a futile attempt to prop up the currency, the government's foreign currency reserves dropped to $4 billion, an amount insufficient to carry the country through another day. Following the collapse of Hanbo Steel in January 1997, six of the country's top 30 chaebol went bankrupt. In December 1997, barely a year after joining the Organization for Economic Cooperation and Development (OECD), Seoul turned to the IMF for economic assistance. At virtually the same time, South Koreans elected longtime democracy activist Kim Dae Jung to the presidency, the first time since the early 1960s that an opposition leader had won the country's highest office.

After negotiating for weeks over the details, on December 4, 1997, South Korea and the IMF agreed to a $58 billion support package. In return, Seoul agreed to tighten its fiscal and monetary policies and engage in far-reaching, market-oriented reforms of its financial and corporate sectors, and of its labor market policies. South Korea also agreed to open its economy further to foreign goods and investors. The newly-elected Kim government adopted most of the structural reforms as its own.

Following the financial crisis, South Korea entered into a severe recession. Gross domestic product (GDP) contracted by 6.7% and unemployment nearly quadrupled, rising to 7.6% in 1998. The slowdown generated substantial anti-IMF and anti-American sentiment among many South Koreans. The economy rebounded in 1999 and 2000, growing by over 10% and 9%, respectively, and enabling the South Korean government to rapidly retire many of the debts it incurred in 1997. (1) In 2001, however, growth slowed considerably, dragged down by a combination of internal and external developments, including a decline in consumer and business confidence, due in part to a perception that the post-crisis restructuring drive was faltering; the bursting of Korea's stock market bubble; rising oil prices; and a sharp falloff in exports to the United States and Japan, which entered economic downturns of their own. The government responded by lowering interest rates, unveiling an economic stimulus package, and easing the rules on the use of credit cards.

These …