The Korean Peninsula Security Crisis and U.S.-ROK Economic Relations

October 6, 2003

Co-sponsored by the Brookings Institution’s Center for Northeast Asian Policy Studies (CNAPS), the Korea Economic Institute (KEI) and the Korea International Trade Association (KITA), this policy forum brought together experts from the United States and Republic of Korea (ROK). Past and current U.S. and ROK government officials, scholars, international economists, and industry representatives met on Capitol Hill for this off-the record discussion of the current security tensions on the Korean peninsula that have created challenges of both conflict management and economic cooperation. It consisted of two panels. Panel One addressed the security crisis and macroeconomic issues. Panel Two addressed the status of bilateral trade and investment issues.

Participants stressed the importance of the U.S.-ROK relationship, which is now facing only the latest in a series of crises since it was established in 1953. American and Korean participants emphasized that a strong relationship must rest on the dual pillars of the security alliance and the economic partnership. Neither pillar can be ignored. Weakness in one will affect the other.

Security Issues

Panelists agreed that the current situation combines positive and negative factors. On the positive side, there is broad consensus among the countries concerned that the fundamental objective is a non-nuclear Korean peninsula and that the crisis should be resolved peacefully. Moreover, through Chinese facilitation, there now exists a negotiating process that includes the United States, North Korea, the ROK, China, Japan, and Russia, and through which conflicting interests might be resolved. And there was an understanding of the high stakes involved and of the unfavorable situation that will emerge if the crisis drags on indefinitely. On the negative side, North Korea, which began the crisis in the first place in October 2002, has periodically taken aggravating steps since then, some designed to drive wedges between other members of the six-party talks. How to realize the shared goal of a non-nuclear Korea and satisfy Pyongyang’s desire for a sense of security, full participation in the international community, and normalization of relations with the United States will require creativity. Communication and coordination among Washington, Seoul, Beijing, Tokyo, and Moscow—particularly between Washington and Seoul—will be essential if a deeper crisis is to be avoided and a diplomatic solution achieved.

Macroeconomic Issues

The U.S.-ROK economic relationship is still very strong. South Korea is the United States’ sixth largest market, buying $26 billion of US goods annually, with the U.S. purchasing even more from South Korea. Korea recovered relatively quickly from the 1997-1998 financial crisis. Current economic indicators reveal that the ROK has low inflation and unemployment rates. A decline in foreign direct investment over the last several years is a cause for concern, though security issues do not seem to account for this. As the world’s 12th largest economy, South Korea has played an increasingly active role in international trade and economic issues, but could make more of a contribution in the WTO forum.

Trade and Investment Issues

Participants agreed that as major trading partners, the United States and Korea should strive to achieve more open markets. All agreed that in recent years – with the emergence of China – the economic relationship between China and Korea has deepened, and that the U.S.-ROK economic relationship is in a period of change. The participants agreed that general interests should prevail over narrow interests, and that necessary concrete steps for reform should be implemented. While acknowledging the effectiveness of the two governments’ quarterly trade consultations, they argued the need for more channels to successfully address outstanding trade issues. They said that regional trade was overshadowed by the current tension in the Korean peninsula. All agreed that geopolitical stability was important to facilitating free trade between the two countries. However, they said the two countries faced a number of bilateral trade challenges.

The American panelists said that transparency in the Korean regulatory environment needs to be improved; intellectual property rights enforcement should be enhanced in order to prevent digital online piracy. More efforts should be made from the Korean government to streamline foreign direct investment. The labor environment should also be improved. Currently, American companies cite lack of labor flexibility, high wages resulting in low productivity, and violence in labor disputes. Screen quotas set on foreign films by the Korean government is also a stumbling block in concluding a bilateral investment treaty between the United States and Korea. They also noted that a very small number of American cars was sold in Korea in 2002, compared with the large number of Korean cars sold in the United States.

The Korea panelists said that the trade disputes were byproducts of reform-oriented policies. Since Korea’s democratization in the 1980s, private interests have played a dynamic role in the political arena. Formulating solutions to trade issues is easier than coordination among government agencies and the business sector, and coping with domestic political forces. Korean panelists also pointed out that in setting the agenda for the bilateral trade talks, Korea’s voice should be equal to that of the United States.