US-China competition poses new test for 70 years of shifting Korea-US economic ties

Posted on : 2023-06-13 16:03 KST Modified on : 2023-06-13 16:03 KST
A whirlwind of drama has unfolded between Korea and the US as they wavered between cooperation and conflict, pressure and free trade
A special session of the US-Korea FTA Joint Committee takes place on Aug. 22, 2017, at the Lotte Hotel Seoul ahead of the renegotiation of the trade agreement. (courtesy of the MOTIE)
A special session of the US-Korea FTA Joint Committee takes place on Aug. 22, 2017, at the Lotte Hotel Seoul ahead of the renegotiation of the trade agreement. (courtesy of the MOTIE)

In the 70 years since the Korean War, the volume of trade and capital investment between South Korea and the US multiplied by the hundreds and the thousands, respectively. In other words, relations between the two countries have grown more intimate and deepened at an extremely fast pace, at least in the economic realm.

But even within such a framework, a closer look shows a whirlwind of drama unfolding between the two as they waver between cooperation and conflict.

As the South Korean economy grew at a speed almost unprecedented in the 20th century, warranting the expression, “Miracle on the Han River,” and as the US modified its foreign policy and the international situation changed, a tug-of-war between the two countries ensued. The system of economic cooperation between South Korea and the US is entering another turning point in the face of strategic competition between the US and China and the age of supply chain fragmentation.

From free aid to paid loans: Shifts in Korean economic policy

Without much accumulated capital in the aftermath of the war, South Korea used aid funds from the US as its emergency seed money. It’s not an exaggeration to say that South Korea’s postwar economic recovery and revival began with US assistance. This is why scholars call the 1950s the “free gift aid economy” period and the 1960s the “long-term low-interest loan economy” period.

According to data from the Korea Development Institute’s Economic Information Center retrieved on Sunday, the amount of free aid South Korea received from the US in the 20 years following the war (1953-1972) totaled US$3.226 billion. Between 1946 and 1978, total aid including loans received by South Korea from the US amounted to US$6 billion. Considering the amount of aid received by African countries as a whole (US$6.9 billion) and South American countries, geographically close to the US, as a whole (US$14.9 billion) during the same time period, South Korea received a not-insignificant amount of aid.

In the late 1950s, US aid accounted for more than 10% of South Korea’s gross domestic product. US aid topped South Korea’s yearly tax revenue for multiple years as well. In a sense, US economic aid covered for vulnerable native capital caused in part by a low savings rate and minuscule public revenue.

In a scholarly article published in 2001, Bank of Korea monetary policy board member Cho Yoon-je wrote, “Immense aid from the US played a big role in preparing [South Korea’s] economic take-off in the 1960s,” adding, “At the time, US aid authorities matched their aid program to South Korea’s macroeconomic and industrial policy direction, exerting great influence on domestic economic policy.”

Changes in the US’ economic aid method prompted changes in the South Korean economy. Starting in the late 1950s, the US started distinguishing between economic and military aid and emphasizing the role of private capital. In particular, the method of monetary aid changed from free aid to low-interest loans. This measure was taken to account for the domestic economic situation in the US, such as cumulative deficits in the US’ current account balance and fiscal balance.

Specifically, free aid from the US peaked in 1957 (US$368 million), continuously dropping to US$131 million in 1965 and US$2 million in 1973. “Changes in US aid policy motivated [South Korea] to shift from focusing on import substitution to pursue an export-oriented industrialization policy starting in 1958,” Cho analyzed.

Having succeeded in rapid industrialization following the 1960s, South Korea quickly expanded its economy and increased its trade volume with the US to US$7 billion by 1978, at which point it sought to shirk off its beneficiary-donor relationship and establish a horizontal partnership with the US.

1986: Trade surplus and trade friction, pressure to open markets

During the mid-1980s, the South Korean economy continued to grow amidst a favorable international economic environment, such as the “three lows” of low oil prices, low dollars, and low interest rates. In 1986, it recorded a trade surplus (US$3.13 billion) for the first time. At the time, South Korea exported products worth US$13.88 billion to the US market, its trade surplus with the US amounting to US$7.33 billion. In other words, South Korea’s trade surplus could not have been possible without the US. It wasn’t a coincidence that the Foreign Economic Cooperation Fund Act, which symbolized South Korea’s transition from aid beneficiary to aid donor, was enacted in December 1986.

Afterward, South Korea’s exports to the US and its trade surplus multiplied, stirring changes in South Korea-US relations. The US started holding South Korea in check in earnest. In a report submitted to US Congress in 1992, the US federal government declared that it would induce South Korea to join the OECD and eradicate its tariff and non-tariff barriers against US products and services. In other words, it would aggressively demand South Korea to open its markets.

In its series entitled “Global Contagion” published after the global financial crisis of 1997 in February 1999, the New York Times referenced the situation in the early 1990s: “There is considerable evidence that top Clinton Administration officials were involved in some efforts to seek freer capital flows, as when they pressed South Korea to liberalize its financial system. After interagency discussions, the Administration dangled an attractive bait: if Korea gave in, it would be allowed to join the Organization for Economic Cooperation and Development, the club of industrialized nations.”

In reality, after South Korea joined the OECD in 1996, economic relations between South Korea and the US rapidly shifted towards marketization, including the opening and liberalization of financial and capital markets such as the foreign exchange market, the easing of restrictions against foreign investment, and the elimination and easing of various government regulations.

These changes were accelerated by the financial crisis in 1997 and relief loans from the International Monetary Fund. South Korea received US$21 billion in relief loans under the leadership of the US, a major shareholder of the IMF, which sped up the opening of markets and marketization in the country in turn.

S. Korea-US FTA: Shifting alliance and changing landscape

When the South Korea-US Free Trade Agreement (FTA) took effect in 2012, it was a symbolic moment showing how the economic relationship between the two sides had shifted. Achieved through an alignment of both sides’ interests, the FTA had the effect of tightening up the loosening trade structures between them.

In 1990, exports to the US reached a peak of 29.8% of all South Korean exports during the period of rapid industrialization advances. But after that, they went into decline, slipping to almost 10% by the early 2010s. This was the result of South Korea’s diversification of its exports and China’s integration into the global market, among other factors.

But after the FTA took effect, the scale of South Korea-US trade began rising again.

“The South Korea-US FTA upgraded the two sides’ relationship from a politically and militarily focused one to one centered on substantive economic partnership, and it also signified a milestone in development toward a model of bilateral cooperation,” explained Cho Sang-hyeon, director of the Korea International Trade Association’s Institute for International Trade.

South Korea-US relations ended up hitting another rough patch in 2017 with the arrival of the Donald Trump administration in the US, with its “America First” focus. The two sides found themselves at odds over their respective economic interests.

As the COVID-19 pandemic led to fraying of supply chains and a protectionist wave rippled out from the US, the South Korean economy was faced with new challenges and trials, caught in the slipstream of the US-China strategic rivalry and an era of economic security concerns.

Thrown into this mix was the sensitive issue of South Korea’s economic relationship with China, which centered on semiconductors, batteries, and other forms of advanced technology. Meanwhile, the economic relationship with the US was shifting beyond an alliance of “free market values” into a more complex and comprehensive strategic alliance with elements of both cooperation and conflict.

“South Korea has a substantial scale of indirect exports to the US market via third countries, and a large part of our high-tech industry’s core technology and equipment is sourced in the US,” explained Kang Du-yong, a senior research fellow at the Korea Institute for Industrial Economics and Trade.

“We need a consistent foreign policy of working to stop the excessive politicization of trade — which has the potential to create ‘blocs’ in the global economy — and clearly stating our principle of opposing measures that threaten a free and open global trade environment, while cooperating with like-minded countries and winning the US over to our views,” he urged.

By Cho Kye-wan, senior staff writer

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