This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• In the ongoing investigation into whether Samsung manipulated stock prices to facilitate a merger between two subsidiaries, Korean prosecutors faced scrutiny for ignoring independent recommendations against an indictment.
• Domestic pundits now add that continuing the investigation into Samsung may strengthen hedge fund Elliott Management’s legal case against the Korean government.
• This comes amid growing anxiety that legal probe into the conglomerate could harm the broader economy already affected by the pandemic-induced recession.

Implications: Many domestic market influencers see aggressive foreign activist investors as a bigger threat than potential improprieties by domestic conglomerates. Citing international media reports, many Korean market commentators argued that the government’s ongoing probe into Samsung could strengthen Elliott’s lawsuit against Korea’s sovereign wealth fund in a related legal case. These activist investors were initially seen as potential forces that could help discipline perceived improprieties by large companies like Samsung. However, Elliott’s decision to sue the Korean government may have turned that initial enthusiasm into anxiety.

Context: Elliott Management was a minority shareholder of a Samsung subsidiary that were merged to secure Vice Chairman Lee Jae-yong’s controlling share of the conglomerate. The hedge fund claimed that their buyout was underpriced, reportedly incurring losses as high as USD 770 million. It blamed Korea’s National Pension Service, another minority shareholder, for casting the decisive vote sanctioning the merger. This became the basis for the lawsuit against the Korean government at the Investor-State Dispute (ISD) Tribunal. However, the ISD rejected an earlier attempt by Elliott to access government files to bolster their claim.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

Picture from an article published in The Investor on July 10, 2017

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• Samsung’s vice chairman Lee Jae-Yong was indicted on charges of engaging in stock price manipulation, unfair trading and other illegal means to tighten his control over the country’s biggest conglomerate.
• However, the court did not issue an arrest warrant, raising doubts on the strength of the prosecution’s case.
• This coincides with Bank of Korea’s recent announcement that the economic decline in 2020 may be deeper than the previously expected contraction. It also lowered growth projections for 2021.

Implications: Adverse economic conditions created by the pandemic may prevent the Korean government from disciplining the country’s conglomerates. Although Samsung has been on the defense since revelations of its involvement in ex-President Park Geun-hye’s influence-peddling scandal, the company has leveraged the economic uncertainty to renew the argument that harm to the company could damage the national economy. More broadly, the COVID-induced recession has allowed conglomerates to justify layoffs without consultation with labor unions.

Context: The belief that disciplining conglomerates could negatively impact the national economy is widely circulated. In response, the Korean government has been highlighting the role of small and medium enterprises (SMEs) in the development and export of testing kits in the ongoing global health crisis. By presenting SMEs as competitive actors on the global market, the government may look to disarm the common argument that companies like Samsung are too important to face legal consequences for its behavior.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

From the flickr account of juan nuñez parilli

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• On August 12, Samsung Fire & Marine Life Insurance became the first Samsung affiliate to finalize a collective bargaining agreement with its union.
• Last December, a court sent Samsung Electronics Board Chairman Lee Sang-hoon to prison and charged 25 others at the company with sabotaging union activities. Lee is widely considered to be Samsung Group’s second-in-command.
• A separate court ruling in October also ordered Samsung to present a plan ensuring the company would not break the law again.

Implications: The Korean government’s attitude towards union activism shapes domestic conglomerates’ openness to negotiations with their workforce. Under the pro-labor Moon Jae-in administration, Samsung is the latest company to signal its conformity with the government’s pro-labor posture by accepting collective bargaining. Many other companies permitted their workers to form new unions, including steelmaker POSCO and online search portal Naver.

Samsung may have been further motivated to accept unionization after the country’s courts demonstrated their willingness to levy harsh penalties on Samsung leaders. While the latest deal between Samsung Fire & Marine Life Insurance and its employees does not clearly guarantee negotiations on wages, the government’s persistent support for labor unions will likely lead to more explicit commitments from corporate leadership.

Context: Samsung has been behind the curve on unionization. Competitor LG Electronics has had a union since 1963, and Hyundai Motor employees have been unionized since 1987. In accordance with the October court ruling, an internal compliance commission recommended that Samsung Vice Chairman Lee Jae-yong end the firm’s no-union policy. Since then, workers at many Samsung affiliates established unions and began negotiating with management.

Korea View was edited by Yong Kwon with the help of James Constant, Sophie Joo, Sonia Kim, and Chris Lee.

Picture from flickr account of ETUC CES

By Kyle Ferrier, Sang Kim, Yong Kwon, and Troy Stangarone

After the U.S.-North Korea summit in Singapore, 2019 was supposed to be the year that the United States and North Korea worked out a deal to begin dismantling its nuclear weapons and ballistic missile programs. It was not to be. The talks fell apart at the Hanoi summit, dashing hopes for increased inter-Korean cooperation, and the process never got back on track.

The breakdown of U.S.-North Korea talks, however, wasn’t the only major relationship to face trouble in 2019. South Korea’s relations with Japan hit a low point as Tokyo surprised everyone by placing national security restrictions on three key chemicals for the production of semiconductors, threatening South Korea’s most important export industry.

South Korea’s economy also took a hit. The trade tensions with Japan, in combination with the U.S.-China trade war, already slowing exports of semiconductors, and slowing global growth, resulted in South Korea’s lowest level of GDP growth since the Global Financial Crisis.

As we look forward to the rest of 2020, there will be significant focus on developments with North Korea and South Korea’s relationship with Japan. Political change could be in the offing as well, as elections are set for the National Assembly and the presidency in the United States. But domestic issues dealing with the elderly and South Korea’s declining fertility rate will also be in focus.

With that in mind, here are 10 issues related to North Korea, South Korean politics, and U.S.-Korea relations to follow that will have an impact on the Korean peninsula in the year to come:

Efforts to Denuclearize North Korea

Despite realizing the first ever U.S.-North Korea summit meeting in 2018, talks between the United States and North Korea largely came to a halt last year. The question for 2019 is what comes next in U.S.-North Korea relations. With Pyongyang announcing that it no longer feels bound by its prior pledges not to conduct nuclear weapons or ballistic missile tests, there are concerns that the Korean Peninsula may return to the “fire and fury” period of 2017.  Alternatively, North Korea could attempt to return to talks with the United States and to strike a deal prior to the 2020 presidential election. However, the North Korean leadership likely recognize that any attempts to negotiate deal could be undone by a change in administrations in the United States.

More likely, North Korea will continue to increase its stockpile of weapons and engage in efforts to advance its weapons technology, while avoiding the types of tests that might force the international community to tighten the sanctions on its economy. In the absence of a provocative test by North Korea, another issue to watch will be how well the sanctions regime will hold. Russia and China have already signaled that they may have a waning patience for sanctions.

Reaching an Agreement on U.S.-Korea Military Burden Sharing

Contentious negotiations between Seoul and Washington on a new Special Measures Agreement (SMA) – determining how much South Korea contributes to hosting U.S. military forces – have unsurprisingly lapsed their December 31 deadline. The Trump administration’s call for Seoul to increase its 1.02 trillion won contribution by 400% caused a stir among South Koreans in the second half of last year. The sheer size of the proposed jump seemed to suggest that the U.S. underappreciated their country’s support for the alliance and led many to question the nature of the relationship. Talks are set to resume this month, but it’s unclear in what direction they are heading. In late December the South Korean newspaper Chosun Ilbo reported Washington’s asking price had dropped to only a 10-20% increase, which U.S. officials later denied.

The conditions of a new SMA could have significant implications for the alliance, though there are still many unanswered questions. Other than the amount, the other significant aspect to follow is duration. If the U.S. again pushes for a one-year deal – rather than the multi-year agreements that both sides usually agreed to prior to the Trump administration – it could be a big gamble for South Korea given the U.S. presidential election in November. Since Trump himself is by all accounts driving the U.S. position, if he were to lose his re-election campaign then his Democratic opponent would be much less likely to pursue such a hardline stance. However, should Seoul and Washington strike a one-year deal and Trump wins in November, the new SMA talks could be even more of a challenge to the alliance than they have been recently.

Revitalizing the South Korean Economy

The South Korean economy is in the doldrums. GDP is expected to have only grown by 2 percent last year, the lowest since the wake of the global financial crisis in 2009. Even if the government were to hit its 2.4 percent growth target – which many see as too ambitious – it would mark the first time since at least 1954 that the country recorded back-to-back years of lower than 2.5 percent growth.

Getting the economy back on track is among President Moon’s highest priorities for this year. Though the administration’s “income-led” growth policies have produced limited results so far, the Blue House will amplify its efforts this year with new plans for infrastructure, job creation, and social spending. But, the question still remains whether these initiatives will be enough to reinvigorate the economy. Moon’s detractors continue to argue his policies still don’t do enough to account for business interests and are therefore destined to fail. What will likely have a much greater impact on the direction of the South Korean economy this year, however, are major developments abroad. Increased demand for semiconductors and a resolution between Beijing and Washington on trade issues could be a boon for the economy, just as much as further uncertainty could act as a drag.

The Course of South Korea’s Relations with Japan

Last year saw relations between South Korea and Japan hit one of their lowest points since the normalization of relations in 1965. In response to a South Korean Supreme Court’s decision in 2018 that Japanese companies were liable for their use of forced labor during the Second World War, Japan decided in July to place national security restrictions on three key chemicals for the production of semiconductors and later to remove South Korea from its “white list” of trusted exported partners. South Korea responded by removing Japan from its “white list” of trading partners and announcing that it would not renew its military intelligence sharing agreement with Japan – though that has been delayed for the moment.  Despite lower level meetings and a meeting between President Moon and Prime Minister Abe Shinzo in late December, South Korea and Japan have been unable to resolve their disputes. The question for 2020 is whether the two sides will be able to find a resolution to their economic and historical disputes that would allow them to improve relations, or whether this could become the new normal.

Can 5G Help Improve the Prospects of South Korea’s Semiconductor Industry?

With Samsung and SK Hynix two of the world’s dominant producers of memory chips, along with the U.S. based Micron, South Korea was well placed to take advantage of the growing demand for memory chips in recent years. In 2017 and 2018, a surge in demand in the semiconductor industry helped to turn memory chips into South Korea’s top export item, accounting for nearly 14 percent of exports in 2018 and up from just 5 percent in 2014. However, the super cycle began coming to an end in the second half of 2018 and sales continued to decline throughout 2019.  The prospects of recovery have been clouded over the last year by Japan’s new export restrictions and the U.S.-China trade war. They have also been hindered by the slower rollout of 5G around the world due to U.S. efforts to convince countries not to use Huawei for their 5G infrastructure. However, there is hope that as 5G comes online in more markets demand for new 5G capable phones, along with the continued growth in data centers, will help to boost the prospects for South Korea’s most important industry.

How the U.S. Presidential Elections Could Impact Policy

Although taking place outside the Korean Peninsula, the U.S. presidential election in November will have a significant impact on the Korean Peninsula. The election of Donald Trump in 2016 brought about a significant shift in how the United States manages its alliances with countries such as South Korea and its policy towards North Korea. The shape of U.S. policy on issues related to burden sharing, trade, and North Korea will likely all depend on whether Trump is able to win reelection. Those policies could all shift if the Democratic nominee or another Republican were to win the White House in 2020 if Trump were removed from office.

Legislative Election in April will likely Shape the Platforms and Outlook of Korea’s Major Parties

In addition to the U.S. presidential election in November, South Korea will hold a critical election in April for all 300 seats in the country’s unicameral legislature. This election will serve as a litmus test for the public’s confidence in the incumbent administration’s direction and determine President Moon Jae-in’s ability to advance policies during his remaining time in office. Taking a broader view, the election is historic because new faces representing new constituents will take their seats in the next legislative session. The National Assembly’s recent decision to lower the voting age from 19 to 18 will bring 530,000 potential new constituents to the polling booth in April. It is unclear yet how this will impact support for either conservative or progressive parties – but this will no doubt impact the platforms of respective parties looking to win the support of this new cohort. This perhaps partly influenced the leading parties’ decision to retire prominent legislators who had long been the face of the political establishment. Examples include former ruling party legislator and presidential chief of staff Im Jong-Seok and former opposition leader Kim Moo-sung. The upcoming general election, therefore, acts as a beginning of a new period for the increasingly assertive National Assembly.

Can South Korea Improve Its Fertility Rate

South Korea faces a demographic crisis. South Koreans are living longer and South Koreans born a decade from now are expected to have among the longest lifespans of any group of people in the world. However, the question facing South Korea is how many children will be born when the country attains this public health success? In 2018, South Korea had a total fertility rate of 0.98, a historic low, and the final data for 2019 is expected to be even lower. Through September of last year, births were down 8.9 percent from 2018. It will take time and significant social change to return to anything close to the number of births that would allow Korea to reach the replacement rate of 2.1, but the key to watch in 2020 is whether South Korea is able to introduce measures to reverse the current trend and return to a total fertility rate of at least 1.0. The odds are likely stacked against it.

Will the Government Comprehensibly Tackle Elderly Poverty?

President Moon Jae-in pledged to improve the social safety net upon his election in 2017. Since then, the South Korean government’s efforts to assist underemployed youths, curb the financial burdens of childcare, and raise the minimum wage have received the most attention from economists and the media. This can be attributed to the expectation that these policies will have the most impact on South Korea’s human capital resources and industrial productivity in the years ahead.

However, the country’s biggest social welfare crisis is elderly poverty. 2017 data from the Organization for Economic Co-operation and Development (OECD) revealed that 43.8 percent of South Koreans over the age of 65 live in relative poverty (defined as earning 50 percent or less of median household income) – well above the average of 12.5 percent for OECD member countries. This is more than any other country in the 34-country community. While the government does distribute a basic pension to elderly who are in the bottom quintile of income earners, the policy (covering around 35 percent of seniors) provides an insufficient amount to those who qualify and leaves those who do not qualify in a precarious economic position.

Moreover, with the future tax base falling alongside declining birth rates, the National Assembly Budget Office noted that reserves of the National Pension Service will reach zero in 2054.

In response to the crisis, President Moon has pledged to increase the basic pension by nearly 50 percent and double the number of job openings for older workers. However, the challenge is not simply a financial one – reports suggest that many elderly also suffer from loneliness and associated mental health issues. This has manifested in several social challenges, including growing crime rate among elderly and the highest elderly suicide rate among OECD countries. Therefore, resolving the elderly poverty crisis will require a more in-depth solution that incorporates community participation and increased public funding.

How YouTube Shapes Media Consumption in South Korea

In 2019, South Koreans spent more time on YouTube than any other mobile apps.  South Koreans teens spent an average of 42 hours a month watching YouTube videos and people in 20s spent about 31 hours. It is also interesting that people in the 50s and above watch a significant amount of YouTube videos with an average of 20 hours a month, more than people in the 30s and 40s. The number of South Korean smartphone users also hit a record high in 2019, now over 91% of the population own smartphones. People now have instant access to content whenever and wherever compared to traditional cable TVs.

So what are they watching? There is a wide variety of content available for any audience across the age range, from mukbang, music videos, product reviews, kids channel, lectures, cooking, to politics and news. YouTube is not only a source of entertainment but increasingly becoming a resource for self-learning and information. It also became an attractive space where people can create their own content to share with others and even make a profits. Because of the popularity and influence of YouTube, being a YouTube creator made it to the topic 3  dream jobs for South Korean elementary schoolers, followed by athletes and teachers.

Given the wide accessibility and popularity, creating a YouTube channel has been a trending communication strategy for companies and even government agencies to send their message and expand their audience. In 2020, YouTube will continue to influence and impact how South Koreans consume online content and we will see more media content tailored toward YouTube users.

Kyle Ferrier is Fellow and Director of Academic Affairs at the Korea Economic Institute of America, Sang Kim is the Director of Public Affairs and Intern Coordinator, Yong Kwon is the Director of Communications, and Troy Stangarone Senior Director and Fellow. The views expressed here are the authors’ alone.

Image created by Juni Kim Senior Manager for Operations and Technology at the Korea Economic Institute of America. Image photos from the flickr Creative Commons photostreams of The White House, the Republic of Korea, and the U.S. Pacific Fleet.

By Hyoshin Kim and Junsoo Kweon

5G offers faster data speeds than current mobile networks and could transform the global economy through fields like Internet of Things (IoT) and self-driving cars. This network is also critical to a nation’s military capabilities. It can share huge volumes of data across vast distances, allowing governments to track missile launches and transmit real-time drone footage.

Given the security implications of the 5G industry, the U.S. government is concerned with China’s rising dominance in this sector. The Chinese company Huawei is already a leading global information and technology provider. It is also active in South Korea’s telecommunications market. As the U.S. government monitors Huawei, the company’s presence as a 5G vendor in South Korea has created a dilemma.

The Trump Administration has warned allies that Huawei is an untrusted 5G vendor. This is because China’s National Intelligence Law requires all people and entities within China to abide by the decisions of China’s communist government. If the Chinese government wanted some information from Huawei’s networks, all it has to do is ask.

To make the situation worse, The Washington Post reported that Huawei conducted “secret operations to build North Korea’s wireless network”. The company’s history of operating in countries like Iran further intensifies concerns around Huawei’s intentions to become the principal provider of 5G technology to East Asia.

Despite these concerns, South Korea continues to accept Huawei contracts. Huawei’s price-competitiveness has attracted significant attention in the race to develop regional 5G network infrastructure. One of the three mobile phone service providers, LG Uplus, in South Korea has partnered with Huawei to build its 5G network. Meanwhile, the Japanese government decided to ban Huawei, pushing back on any official contracts with Huawei in its telecommunications network.

The U.S. government insists that the risk of information leaking to China through Huawei’s 5G networks could endanger the U.S. alliance with South Korea and Japan. Randall Schriver, the Assistant Secretary of Defense for Asian and Pacific Security Affairs, said “The United States doesn’t want to see a situation arise where we don’t have confidence in sharing sensitive information with our ally and information being safeguarded.”

South Korea, in particular, is caught in between China and the United States. China is geographically closer to South Korea and makes up a larger share of its foreign trade. China accounts for 26.8% of South Korea’s exports. Leveraging this economic clout, the Chinese government is pushing South Korea to continue trading with Huawei.

In response, South Korea has been actively developing its own 5G industry that can compete with Huawei. In June, the government of South Korea launched a 5G plus strategic committee to establish a long-term plan to enhance the Korean companies’ share in the 5G telecommunication equipment market. Furthermore, Korea is actively looking to cooperate with ASEAN markets on 5G network buildout, providing an avenue for Korean technology companies to scale-up its 5G capacity.

With the government’s support, Samsung is expanding its 5G business. Already the world’s biggest supplier of smartphones and computer chips, Samsung plans to utilize its existing infrastructure to give it a competitive edge over Huawei in 2020. In addition, Samsung is a leader in the semiconductor industry, which provides core components for 5G base stations and transmitters. As Samsung develops smaller and faster semiconductors, its 5G wireless technology is also anticipated to improve.

Samsung is also positioning to be a possible partner of the United States. Claude Barfield, a scholar at the American Enterprise Institute, argued “It is not clear if Huawei’s two current competitors — Sweden’s Ericsson and Finland’s Nokia — will be able to match Huawei’s prodigious resources. Samsung could develop into a potent third option over the next several years.” As South Korea looks to bolster its own tech infrastructure while balancing its security needs, it is worth paying greater attention to South Korea’s 5G network.

Hyoshin Kim is an Asan Fellow and an intern at the Korea Economic Institute of America. Junsoo Kweon is an Asan Fellow and intern at the Heritage Foundation. The views expressed here are the authors’ own.

Photo from Kārlis Dambrāns’ photostream on flickr Creative Commons. 

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• President Moon pledged to support the bio-health industry in his five-year plan.
• In October, South Korea’s Financial Services Commission (FSC) warned investors entering the bio-health sector to be prudent.
• The FSC strengthened investigations into potentially fraudulent bio-tech companies last week.

Implications: Financial regulator’s warning to investors in the bio-health sector suggests that the government’s concern with market instability overshadows desire to rally private investment to this innovative industry. While the government has been forward-leaning on the sector’s potential for growth, the warning comes on the heels of scandals involving companies’ exaggerated disclosure of information related to clinical development, as well as insider trading allegations. There are concerns that the FSC’s public statement may dampen private investments to this innovative sector. Nonetheless, the government appears to have calculated that small losses today may be less costly than a bigger crisis down the road.

Context: Scandals have already caused market volatility in the bio-health sector. Samsung Biologics, the country’s biggest pharmaceutical company, committed accounting fraud and is currently under investigation. Meanwhile, Kolon TissueGene intentionally falsified its documents to win a license. Revelation of this criminal behavior led to the suspension of transactions involving this medicine. Sillajen was accused of insider trading and spooked investors panicked when the company’s executive dumped $7.4 million-worth of of the stocks.

Korea View was edited by Yong Kwon with the help of Soojin Hwang, Hyoshin Kim, and Rachel Kirsch.

Picture from Wikimedia Commons 

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

U.S. restriction on Huawei could be a boon to Korea’s struggling export industry, but potential gains may be erased by China’s retaliatory measures.

What Happened

• The Commerce Department added Huawei to its list of persons and entities deemed to be acting against U.S. security or foreign policy interests. This discourages U.S. companies from selling or transferring technology to Huawei.
• Analysts suggest that Huawei could increase purchases of Samsung memory chips to substitute gaps in the supply chain created by the U.S. government’s decision.
• Samsung is also expected to increase its global sales of handsets and 5G network equipment as other countries avoid purchasing Huawei products.
• Meanwhile, U.S. government officials are reportedly calling on South Korea to restrict the activities of Korean companies that use Huawei equipment.
• China is preparing its own list of “unreliable companies,” which would include entities that disrupt supplies to Chinese companies for “non-commercial purposes.”

Implications: Although many market commentators see the U.S. government’s restrictions on Huawei as an opportunity for Samsung specifically and South Korea more generally, Korea’s export sector remains vulnerable to retaliatory measures from both the United States and China. Huawei’s search for new chipmakers to substitute U.S. suppliers could boost sales for Korean companies, but Washington may pressure Seoul to limit these transactions. The U.S. government did not officially request that South Korea join its restriction on technology sales to Huawei. Nonetheless, a U.S. State Department official reportedly called on a South Korean counterpart to prohibit LG Uplus, which uses Huawei’s equipment, from participating in “sensitive areas” of the Korean economy. Seoul is still negotiating with the U.S. government on key issues like auto tariffs and cost sharing for U.S. forces in South Korea. In an effort to minimize friction with U.S. counterparts while these talks continue, Seoul may voluntarily take measures to limit trade with China.

South Korea is however vulnerable to potential retaliation from China as well. Beijing could respond to measures limiting business ties between Korean companies and Huawei by strategically punishing Korean firms with significant exposure to the China market.

This comes as Korea’s export sector is under duress. Between May 2018 and May 2019, export shipments dropped 9.4%, exceeding forecasts of a 6.6% decline. Semiconductor exports in particular plunged by roughly 30%. China is South Korea’s largest trading partner, accounting for 26.8% of the country’s exports in 2018 (compared with 12% for the United States). Both the potential retaliatory measures by the Chinese government and any voluntary measures to limit exports to China by the South Korean government present major headwinds for the Korean economy at this time.

Context: There is precedent for South Korea voluntarily restricting trade to advance its foreign policy interests. In response to growing U.S.-Iran tensions earlier this year, South Korea cut its oil imports from Iran ahead of any explicit reimposition of sanctions by the U.S. government. In 1992, Seoul severed ties with Taiwan to establish official diplomatic relations with the People’s Republic of China. As a consequence, Taipei nullified preferential agreements on Korean export of foodstuffs and autos. In both instances, however, the economic cost was considerably smaller than what South Korea is facing today.

Korea View is edited by Yong Kwon with the help of Haram Chung, Yea Ji Nam, Steven Lim, and Haeju Lee.

Photo from Kārlis Dambrāns’ photostream on flickr Creative Commons. 

By Haram Chung

The World Trade Organization (WTO) authorized South Korea to levy $85 million in tariffs on U.S. products as compensation for the improper way the U.S. calculated higher anti-dumping duties on Korean-made large residential washing machines. Apart from this, however, there was a controversy over the U.S.’s safeguard, which imposed another tariff on Korean premium washing machines. It was challenged in the WTO’s dispute settlement system.

In January of 2018, the United States approved safeguard tariffs from a Section 201 case on Samsung and LG’s large residential washing machines. A safeguard, according to the WTO, is a measure taken “to protect a specific domestic industry from an increase in imports of any product which is causing, or which is threatening to cause, serious injury to the industry.” As a sort of a trade barrier, the U.S. used the Section 201 to protect its own domestic industry, however, the WTO decision demonstrates that in this case the safeguard was not justified.

Trade barriers put in place through the use of tools similar to Section 201 are designed to provide temporary protection to industries under threat from unfair trade practices, but they can also be abused to protect a domestic industry to ensure that a producer earns a profit.

However, U.S. citizens are also consumers. The U.S. citizen, as a consumer, can suffer from the use of safeguards. If imported goods lose their competitiveness due to increasing tariffs, the market share of domestic firms will increase. If there is no competitor, domestic enterprises may use the extra profits to raise their dividend rate or product price to earn a profit rather than invest in research and development (R&D). Innovation is hard to expect in companies that have relief instead of competitiveness. Also, if the firm produces merchandise using high cost domestic raw materials or intermediary goods rather than cheaper imports, consumers will pay unnecessarily higher prices.

If the increase of suppliers’ profit is higher than the losses for domestic consumers, the safeguard will have performed its role. As the supply of domestic goods increase with the increase in demand, the effect of increasing the number of jobs can be expected. However, one year after imposing the safeguard, U.S. domestic enterprises have lost market share, only intensifying consumers’ burden. Intuitively it may seem that the overseas company bear the expense of the tariff, but if the firm increases its product prices, consumers who purchase the product at an increased price also bear the cost.

After the safeguard was imposed, Samsung and LG increased the price of their washing machines 8 percent. Whirlpool, which petitioned for the safeguard, saw its market share drop from 17.3% before the safeguard to 15.7%, falling from 2^nd to the third place followed with 19.1% for Samsung Electronics and 17.2% for LG Electronics. Even though Samsung and LG raised their prices due to the safeguards, their market share increased. Conversely, consumers who purchased goods at increased prices have borne the cost of the tariffs.

Although local consumers are paying higher prices for goods, proponents suggest that the future gain is expecting to surpass the initial disadvantage. However, potential success stories are few and far between. Similar efforts by the previous government generally failed to protect factories and jobs. The Obama administration levied tariffs on Chinese tires to curb their impact on the U.S.’s domestic tire market. Nevertheless, according to a report from the Peterson Institute for International Economics, the tariffs protected 1,200 jobs, while costing the retail sector almost 4,000 jobs and domestic consumers spent $1.1 billion more on tires because of tariffs.

Likewise, a retaliatory tariff, which is authorized by WTO, is not always helpful in the economy. In Korea, it can also burden consumers, and in the U.S., not only consumers who have been saddled with import duties, but also producers in other areas can become the scapegoat of retaliation. Unnecessary tariffs do not fulfill anyone’s interests. The Trump administration is scheduled to announce the result of a review on whether to maintain anti-dumping duties in April. Not only about the improperly measured anti-dumping, but it also needs to reconsider safeguards that unnecessarily harm whole economy.

Haram Chung is currently an Intern at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from TaylorHerring’s photostream on flickr Creative Commons.

By Troy Stangarone

After years of success in designing and producing memory chips for cell phones, data centers, and other memory storage functions, Samsung has taken a step toward supplying processing chips for next-generation vehicles. From 2021, Samsung’s first automotive branded processor, the Exynos Auto V9, will power Audi’s infotainment system.

While the partnership with Audi has been in place since 2017, the announcement could not have come at a better time for Samsung. A few days after announcing that it would supply the Exynos Auto V9 for Audi’s infotainment system, Samsung also announced that its fourth-quarter profits would be down due to slowing demand for semiconductors and increasing competition for smartphones. Operating profits are down more than 38 percent, with memory chip shipments expected down 10 percent for the quarter due to declining demand from data centers.

Slowing memory chip sales are not confined to data centers. As U.S.-China trade tensions continue, the slowing economy in China will also likely be a headwind for Samsung in the coming quarters. According to data by the Korean Customs Service, memory chip exports in November (the latest data available) were only up 2 percent, after having been up more than 40 percent every month of 2018 outside of October when the slowdown in China likely began.

By entering the automotive processing segment, Samsung can diversify away from its dependence on the memory segment, which has largely driven operating profits in recent years but is also a lower value segment than processing.

Samsung’s partnerships in the automotive market aren’t expected to be confined to Audi. Recent reporting indicates that Samsung is scouring for talent in the autonomous vehicles segment. The producer could move into making other automotive processing chips for autonomous systems and is reportedly producing the new Tesla designed chip for the Model 3.

With the market for memory chips slowing, the automotive segment could be a new area of growth for Samsung. The market for automotive chips was estimated to be worth $22.7 billion in 2016 and is expected to grow to $56.2 billion by 2025. These numbers are still small compared to Samsung’s earnings in the memory segment where it had sales of 60.3 trillion Korean won ($53.7 billion), but the move towards both autonomous vehicles and the increasing integration of technology such as infotainment systems into vehicles will lead to increasing demand for high-value chips to manage the complex processes.

However, Samsung isn’t the only chip maker moving into the automotive sector. Intel, AMD, Qualcomm, and Nvidia, which supplied Tesla until recently, are all looking towards the automotive sector to drive demand for high-end chips, as are other chipmakers. If Samsung is going to successfully lessen its dependence on memory chips, it will need to succeed in a much more competitive segment of the semiconductor market.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America (KEI). The views expressed here are the author’s alone.

Photo from user Honou on flickr Creative Commons.

By Troy Stangarone

To the surprise of even Lee Jae-yong, the Seoul High Court has reduced his sentence related to charges in the scandal surrounding former President Park Geun-hye and suspended his sentence resulting in his immediate release from prison.

After having been convicted on five charges in August of 2017 related to bribery, embezzlement, and the illegal transfer of funds overseas, Lee Jae-yong was sentenced to five years in prison. However, the South Korean appellate court dismissed some of the charges and reduced the amount in the bribery conviction. As a result, his sentence was reduced to two years and six months and immediately suspended for four years.

In deciding to reduce Lee Jae-yong’s sentence and suspend the remainder, the Seoul High Court both demonstrated its independence and left the appearance that little has changed as a result of the scandal surrounding former President Park. At a time when the Moon administration is making an effort to remove prior areas of corruption in South Korean society and public sentiment has favored stronger sentencing against the heads of chaebols convicted of crimes, the Seoul High Court demonstrated a degree of independence by not simply issuing a ruling that would have received favorable political reviews.

However, at the same time by reducing Lee Jae-yong’s sentence to two years and six months while also suspending it for four years, the court also has left the impression that there is a different standard of justice for those who run the chaebol and the rest of society. In the last decade, Lee is among six chaebol heads convicted of white collar crime to end up with suspended sentences or pardons and on the surface this seems to continue that pattern.

Interestingly, the court’s decision ultimately rested on the idea that while Lee Jae-yong and others at Samsung knew that they were engaged in bribery, but that they could not refuse to take part as they were pressured by President Park, the most powerful individual in South Korea, and her friend, Choi Soon-sil. This may have implications for policy makers going forward in efforts to address bribery.

The anti-corruption Kim Young-ran law only came into effect in September of 2016. The law prohibits private citizens from giving gifts to government officials above a certain amount and officials from soliciting bribes. Since the law came into effect after the bribes in the Samsung case took place, it is not applicable as it would place officials and Samsung executives into an ex post facto judgement. However, the only references to coercion in the law relate to efforts prevent the report of bribery. This could create moral hazard where officials in the future continue to ask bribes of the chaebol, who then pay knowing that coercion will lead to their acquittal in court. Instead what may be needed to ensure corporate bribery ends is something similar to the Foreign Corrupt Practices Act making even the act of bribery under coercion illegal for a business person.

While the court’s decision is positive for Lee Jae-yong and Samsung, it may not be the final outcome. Both Samsung and the prosecutor’s office have suggested that they may appeal to the Supreme Court. Samsung hopes to have the remaining convictions against Lee Jae-yong overturned, while the prosecutor’s office would seek to have the appellate court’s ruling overturned. The Supreme Court could decide to uphold the Seoul High Court’s ruling or send the case back for further review.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Samsung Newsroom’s photostream on flickr Creative Commons.