“What took so long?” US-ROK FTA Part 3
My title here could be a bit unfair. The reasons for delays in the talks likely originate from both parties. However I estimate that bulk of the wait had to do with the Korean side. I say this because the US entered in to negotiations right way with a number of countries, and yet the Koreans waited so long. Yet again as I mentioned in my last post it seemed the US was demanding a resultion of the Bilateral Investment Treaty (and with the screen quota issue) before starting FTA talks, so perhaps the ultimate reason for the hang-up was the stubbornness on both sides on this issue.
Like in the US situation, I think the best way to look at this situation is to look at the history of trade, and free trade, in Korea. The most obvious statement about the history of Korean trade is simply there was none. When measurable trade did happen with Korea before this time, it was usually related to either curry favor as under the three kingdoms period, or simply to buy survival or a measure of independence. Regardless, Koreans historically found trade with foreigners as something to be suspicious of or a necessary evil for survival.
To make matters worse, when trade was opened at the end of the 19th Century by the Europeans, it done on unfair terms. So not only was trade seen as a suspicious activity, but also something done when Koreans got the short end of the stick.
Despite all this suspicion, Korea embarked on a very aggressive trade policy at the end of Korean War. However the word “trade” could be seen as a misnomer. Things were sold abroad, but at the same time a number of barriers were erected to keep foreign goods out. One can point at the obvious tariffs and quotas, but I would like to point to the not obvious things to show how deep suspicious is even today to real trade.
A good example can be seen simply flying in and out in Korea. Most, even Koreans, forget the time when Koreans needed a pre-arranged exit visa to leave the country. Thankfully now such restrictions no longer apply today, but you can still see these restrictions live on. Duty Free limits are still lower than in most economies of the same size and stature as Korea. Further, as any foreigner regularly flying in and out can attest to, foreigners rarely are inspected by customs yet Koreans are regularly inspected for violations.
Speaking of flying, you can see it even in the reaction to the choice to fly. Regularly the Korean media decries the amount of Koreans leaving for points afar. One could obfuscate in saying that it promotes “social equity” but I a suspicious of such. Look at the newspaper ads, the cost of a holiday from Seoul to say Bangkok is the same as going to Cheju-do, Koreas most famous vacation spot. The cost of a chain hotel in Seoul or Busan is close to Tokyo or Osaka. At these price points I fail to see why only “the rich” can go to Thailand while “the poor” must pay the same price for Cheju-do. I do however see how such effects another constant morbid worry in Korea, the balance of trade.
Any boy is that worry morbid. It is funny to me that while pundits like to lecture how the US cannot run a trade deficit this size for ever, Korea thinks not only can it maintain its positive balance forever, they worry on how its not increasing fast enough. While I do not want to get into much, this is why I think US trade deficits are more than sustainable short and medium term (and possibly even long term), not only has the US economy found this a stable trade off but the importing economies are more than willing to forego consumption, and some even want to forgone even more consumption.
And this is really what we are talking about here, trade. At the end of the day things need to be traded. What Korea has done for a long time is forgone there rights for share of the US economy. Korea sells say Samsung TV’s for US Dollars. A US Dollar, obviously, can only be spent in the US for goods there. So Korea could buy say a Chevy sedan, however according to Korea’s economic and cultural mindset that’s evil since it would mean one less Hyundai sold. So Korea has all these dollars built up, unspent.
I bring this all up this way in order to point out how hard, a deeply set, socially it is for Korea to accept foreign trade. This is crucial since any trade deal, with Korea being a democracy, needs to be sold to the population as a good thing. Unfortunately one of the problems is how trade deals viewed.
A few years ago, well before the ROK-Chilean Free Trade Agreement, I had a job interview at the Ministry of Foreign Affairs and Trade (MOFAT). In the interview I had to edit/rewrite a speech to be given by a MOFAT official to some economic conference somewhere. The subject was on how Korea has to change the way it discusses economic agreements. The speech talked about how Korea needs to stop framing the internal debate as trade agreements are something Korea is “forced” into by evil foreign in forces out of Korea’s control.
I thought this was a very positive sign for the future, since the generally accepted major effect of free trade agreements is that such a beneficial to both countries. I was hopeful that Korea would start talking about the benefits of such agreements socially within the country. Things like lower prices, greater availability of goods, and more opportunities for Korean businesses overseas.
Alas, that never came to pass. The agreement with Chile was perhaps not only a model on how not to sell the agreement, but also in my opinion poisoned things by promoting social inequality. As I recall MOFAT’s whole argument for the Chile agreement was as follows “Korea is being forced to make this agreement, and other like it, or else Korea will loose its competitive edge since free trading partners get an advantage”. There are more holes in this than a crotched gravy boat. First nobody has a gun to Korea’s head figuratively or literally, second may thing make up a product’s competitiveness, price being only one, accordingly even if Korean goods were more expensive it does not necessarily mean a precipitous drop in sales. Given the weakness of this argument, one could easily make the argument that MOFAT’s argument could be brusquely put, “shut up and bend over Farmer Kim, Lee Kun-hee of Samsung wants to be number one in mobile phones at any cost!”
Before I get ahead of myself, I should reference some of this dialogue from the Korean government. I found quite a few things that shows the tenor of the debate, however the most interesting thing I found was a paper presented by a unit of MOFAT to Pacific Economic Cooperation Council explaining Korea’s push for FTA amongst countries and what issues they are considering. The most notable thing in the document is there not ONE MENTION of the positive effects FTA’s bring to consumers. Not one mention of the broader range of goods presented, the lower prices, or the benefits to Korean companies as a whole from that resulting competition. They don’t even make mention of the possibilities for greater small and medium size business growth.
Given such these arguments from MOFAT, there was little surprise to me that the debate was so contentious. MOFAT’s ham-handed selling of such agreements can be seen as well as the recent US-ROK Bilateral Investment Treaty (BIT) fight. What fight is that? What Treaty? Well of course nobody in Korea will recognize it since it was debated as simply the US “forcing” Korea to get rid of its screen quota. There was no debate on the merits of what Korea was getting in the BIT, the Korean media was too caught up in the quota issue all the while MOFAT could only whine on how Korea is “forced” to make this agreement without any explainable benefits to Korea (according to MOFAT anyway). Just for the sake of comparison, a Google search of the Korea Times website for “Bilateral Investment Treaty” with out “screen quota” yielded 28 articles, meanwhile just “screen quota” alone was worth 128 articles.
Accordingly, if you ask me the reason Korea waited so long to ask for FTA discussions, or for that matter willing to wrap-up the Bilateral Investment Treaty was the deep entrenched aversion to trade of the Korean populace as well as the way that is translated into the actions by the government in ham-handedly promoting such trade. Needless to say, you can probably guess what I think of the future of these talks.
Since I am at a good mid-point, if anybody out there has not fallen asleep or clicked away, I could write more on this on request. Should I continue?
posted by Dram Man @ 4:53 PM
9 Comments:
Heck yeah, you should continue. This is fascinating stuff.
A couple of quick questions and comments...
Korea has run a trade surplus with the United States for quite a long time. And now the US is currently in the position of experiencing both rapidly expanding record-setting trade deficits with our economic "partners" and expanding budget deficits at home.
We finance our budget deficit by selling it to our Asian neighbors [who are ironically flush with our cash recently obtained from selling us more than they buy from us].
We do this when they buy our long-term debt instruments, but this situation only dates back to the early to mid 90s, at least on this scale.
So, Korea makes a truckload of money from the US consumer, sees US debt instruments as a safe place to put its wealth despite the low rate of return, and now in essence not only has possession of our current income, as we flood the aisles at Wal-Mart to buy the latest plastic doo-dads, but also has a legitimate claim to a growing portion of our future wealth, plus interest.
Is this not vendor financing at its ugliest? Not blaming the Koreans, or anyone for that matter. Each side seems to be getting what it wants, but one side of this equation is apparently not looking at the future costs.
What did Korea do with its excess trade dollars before it began plowing them back into US Treasuries?
How long do you think Korea [and her neighbors] will continue financing the overspent American consumer's spending spree?
How much of that spending spree resulted in Americans pulling equity out of ther homes versus actually making more money to spend? How long is that sustainable?
Will a Free-Trade Agreement act as a real balancing force to the long-standing lopsided trade situation or will it just become more "dope for the addict" by making prices of imported goods even less expensive for US consumers?
And finally, will the Fed eventually be forced to inflate away the US debts held by Korea by manipulating the money supply, making this all some sort of nightmarish bookmarking entry, but nothing more?
I have thousand more questions, but will quit here for now.
Thanks again for the discussion.
I think for the most part we may differ on our views of US trade debt and the financing of it. Frankly I think it is a sustainable so as long as both find it so. Further, one must remember in the doomsday scenarios bandied about is the symmetry of their actions.
To explain my point, consider the doomsday scenario of China. If China were refuse to buy US treasuries, the value of their existing holdings would fall dramatically. Doubly so if they were to sell them. In addition it would cause a liquidity crisis in the Yuan since there would be a dramatic rise in the value of the currency. Sure they can stick to their peg, but it would throw all trade (including non-US) since their currency valuation lacks any basis in reality. Add to these troubles would be the fact that their number one export market would be unable to buy thing. This leads to greater, if not massive, unemployment and great social instability, the bane of China's Communist Party.
And what would be the effect for the US? Greater interest rates which may or may not dramatically slow down growth. You have to remember that the early 80's saw rates at almost 20%, yet a recession that was mild compared to the Great Depression and the fearsome "what if's". The US may have to pay more for commodities on the open market (such as Oil), but we have weathered a pretty commodity big shock in the past four years and have actually grown as an economy. Perhaps the only real difference is those Chinese flat screen TV will be 20% higher or so, but then considering they are alreayd 20-30% off competitors prices that may not be that big of a shock (your comments on "doo-dads" is insightful, most of what is imported is conspicous consumption anyway, or in more proper terms "non-core spending").
Final food for thought is to reiterate my original post. US dollars have to spent in the US eventually. Sure they may be used temporarily as the coin of the realm and pass between others outside, but eventually the only use they have is in the US. They key to this all is that these countries are forgoing the consumption of US goods they would normally enjoy.
So what if they dont buy treasuries? what are they going to buy? Gold? Well who ever sell that gold, what is he going to buy with them? Eventually those dollars have to return to buy goods and services inside the US, which in turn will boost the economy and perhaps get us out of whatever economic funk we fell into from the doomsday outset.
So this brings us back, how long is this sustainable? Like I said it depends how much they want to avoid spending those dollars to the determent to themselves. And given the doomsday senarios also mean doomsday in those countries effected, I wager that any change will be incremental and not apocalyptic.
Sorry missed your other thoughts ziggy.
First as far as debt spending by US consumers, no doubt that bill will come due, but to echo the "doo-dads" comment I wonder how much that will effect the US economy specificaly. One great unsaid things about the doomsday senarios is that it does not really effect our underlying economy that much.
So what if say a Chinese company aquires GM? Do you honestly think that company will close all GM factories? If so why do all carmakers with a good share of the US market make it a goal to have a US production base? Why did the Chinese refrigerator company Harier open a plant in South Carolina? The basics will still be there so I fail to see the doomsday.
Or lets take a diffrent issue. If the currency does melt down, the US textile industry may boom with activity since such textiles are now much more affordable. Many dormant industries will get new life because of a falling US dollar.
Your "more dope for the addict argument" is predicated on the pretense that US goods prices are expensivel since there is prohibitive tarriff in place, the problem is there was no prohibitive tarriff there in the first place.
A free trade agreement is in part a nightmare for the opposing country, and good news for the US in my view. One must remeber that most of the talk will center around Korea lowering its barriers not vice versa. An FTA will make it harder for a coutnry to keep the high barriers that cause them to forgo consumtpion. Futhermore since such consumption will be a gradual phenomenon, it will provide the soft landing the doomsdayers seek. Or at least thats how I see it.
Your Fed idea of devaluating the currency through the open market, or even just printing money, is feasible, but I fail to see what would "force" the Fed to do that. Can you expand on this?
On final thing, for a more scholary take I recomend a look at this article in foreign affairs:
http://www.foreignaffairs.org/20050301facomment84201/david-h-levey-stuart-s-brown/the-overstretch-myth.html
Dram Man, You rock. This is an enlightening discussion. Keep it coming.
I wasn't trying to advocate a doomsday scenario. Just curious, actually. I don't know enough about this stuff to even articulate a position, much less advocate one side over the other.
I admit I am somewhat concerned though, considering my upbringing at the hands of older relatives who literally preached day in and day out that debt is bad, but I'm now witnessing the highest personal debt levels and lowest savings rates in the history of the United States.
Fortunately, my own debt levels are negligible.
I understand all these macro-economic things so poorly I'm really just trying to get a grasp on the issues.
More questions to follow, but to get started, let me ask you...you wrote, Frankly I think it is a sustainable so as long as both find it so.
But, from my own admittedly ignorant perspective, I see what amounts to the United States selling an "equity" percentage of the nation's wealth in our current debt financing.
I believe Bernanke or Buffet or someone recently said it is upwards of 4 to 5% per year of our nation's assets leave our coffers and end up owned by foreignors.
Even assuming that the underlying US economy continues to grow, if it doesn't at least match the transfer ratre, isn't it a mathematical certainty that eventually the entire country could wind up [theoretically, of course] being owned by foreignors, and our purpose in life would be to labor away to make the interest payments on that debt?
You said that all dollars eventually have to return home, but help me understand that. Why can't China just load up on Treasuries indefinitely and collect the interest for as long as she wants? She grows richer, we grow more indebted trying to service that debt by issuing more, and I just don't see how the wealth returns home?
At least until the point where US labor costs are lower than Chinese labor costs and we start to become a manufacturing nation again.
What am I missing?
Thanks.
Ah, I found it. This is what I was referring to earlier. I think.
A Buffet article [Warren, not Jimmy] from the November 10th, 2003 Newsweek.
http://www.berkshirehathaway.com/letters/growing.pdf
The graph on the second page is frightening to me.
Would appreciate your comments.
First thanks for your contribution as well. I too am far from an expert on the issue, and the doomsdayers, as I perhaps unfairly refer to them, do make good points. I think most of my commentary against them is more on scale than on mechanics.
Warren Buffet's Squanderville is an excellent example of the mechanics. However I want to raise a point on the scale of things. He is right, the bill for Squanderville will eventualy come due. However he leaves out the fact that Squanderville is a rather robust economy growing by leaps and bounds. Squanderville is growing population wise both organicaly and through immigration from Thriftville and Povertyville. Futhermore Squanderville's productivity (how much food they make in that theoretical 8 hours) has increased substantaly in the past 20 years.
Er go, I submit that since Squanderville in the future will have more people working much more effectively in the future. Accordingly the bill that comes due from Thriftville will be spread over so many people producing so much that the impact will be much less than expected.
It is true that Thriftville may own the only assets, but I ask you so what? Thriftville cannot take that asset home can they? In order for Thriftville to get paid they would need for the residence of Squanderville to work that land right?
As for graphs, compare that to US graphs for population and productivity. Those might give you some comfort.
So to get back to the real world, forgieners may gain 5-6% of US assets...so what? Japan was doing the same thing in late 80's and early 90's look what happened to them. Or more specficaly are we working NOW tirelessly for the rich Japanese? Has Japanese economy leap-frogged the US economy? This is another aspect of this doomsday that bothers me, its reminds me of a broken record.
Sure the Chinese can come and buy US compaines. This does not make them any more immune to market forces. You actualy expect me to beleive that these companies would suddenly stop operations and thereby ruin their investment? Do you expect the Chinese to suddenly stop competing for market share? competing for labor (raising wages)?
In fact I am all for such ownership in a way. What better way to expose the Chinese to westren style laws and reguation on transparency, labor relations, and the environment. Would China actualy be more likely to risk war with the US when they own large US assets?
This brings me back to the symmetry argument. Can you image the havoc that would happen if the US was forced into these possitions? If you ask me the Chinese, Japanese, English, Jamacians, and the little green men, have it in their best intrest to make a soft landing for the US, otherwise face the concequences to their own economies. Sure they just bought a 100 million dollar company. Would it make sense for them to bite the bullet and make that asset now worth 10 million?
If I can ask one question to get an honest awnser, I would love to needle these people with asking "What if that 5-6% was going to Canada? Would you worry the same amount?"
What your missing on the Chinese angle is exactly my point in a way. China could very well buy Tresuries in perpetuity and never spend them. What good is that for China as a nation? What good does it take to have all the money in the world if you cannot spend it?
As far as the US side of the debt, isnt that a sweet deal? We are borrowing money we will never have to repay since China will never cash that in for goods and services (according to your conditions). At that stage we are literaly trading real goods for worthless peices of funny colored paper. Sweet!
Dram, this is very enlightening.
Right now I'm in the middle of reading the Foreign Affairs article you referred me to, so I'll try to get back to you with comments and questions later.
Very, very informative.
Thanks.
And how in that case it is necessary to act?
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