By Juni Kim

Next week’s U.S. presidential election has, to put it mildly, significant implications for the future of U.S.-Korea relations. The Trump administration’s aggressive approach to rethinking U.S. alliances has unnerved longstanding allies like South Korea. The last four years saw the renegotiation of the U.S.-Korea Free Trade Agreement, U.S. demands for South Korea to pay more for military costs, and Trump’s push for withdrawing U.S. troops stationed abroad. Stalled peace talks with North Korea also underline the continuing danger of North Korea’s increasingly capable missile and nuclear arsenal.

To understand where American voters stand on important issues on U.S.-Korea relations, KEI commissioned a study by YouGov that surveyed 1,064 American adults on August 26^th to the 31^st. Respondents were asked both who they voted for in the 2016 presidential election and who they would likely vote for in next week’s election. The results show that despite a split response among likely Biden and Trump voters on approving the Trump administration’s overall handling of South Korea and North Korea, there is clear agreement by American voters on specific policy issues like North Korea’s denuclearization and stationing U.S. troops in South Korea.

When asked on approving or disapproving of the current administration’s handling of relations with North Korea, 70% of likely Biden voters predictably disapproved while 69% of likely Trump approved. The split is similar for respondents who voted in the 2016 presidential election, with 72% of Democratic candidate Hillary Clinton voters who disapproved and 74% of 2016 Trump voters who approved. On approving or disapproving of the administration’s handling of relations with South Korea, 22% of likely Biden voters approved and 65% of likely Trump voters approved.

Despite the wide split on the administration’s overall approach to North Korea and South Korea, U.S. voters generally agree on how important it is for North Korea to give up is nuclear arsenal. Likely Biden and Trump voters responded nearly identically with 89% and 88% respectively believing it is very important or important. There is some divergence when voters were asked about the U.S. providing humanitarian assistance to North Korean citizens. More likely Biden voters (60%) are in favor of providing assistance than likely Trump voters (47%), though there are still more Trump voters approving of assistance than disapproving (25%).

U.S. voters also show general agreement on the benefits of U.S.-South Korea trade, the U.S.-South Korea military alliance, and support for U.S. troop presence in South Korea. 74% of likely Biden voters and 67% of likely Trump voters believe that U.S. trade with South Korea is beneficial for the United States, and 68% of both sets of voters believe the U.S.-South Korea military alliance is in U.S. national security interests. Despite Trump’s critical view of U.S. troop presence abroad, including in South Korea, more likely Trump voters (66%) are in favor of maintaining or increasing troop presence in South Korea than likely Biden voters (59%).

Even in the current divisive political climate, the results reflect an understanding by Americans regardless of voter preference of the importance of the U.S. commitment to South Korea and the seriousness of the North Korean threat. While voters may be divided on Trump’s own performance, the public consensus should be noted by the next administration and how it approaches relations to the Korean peninsula.

Juni Kim is the Senior Manager for Operations and Technology at the Korea Economic Institute of America (KEI). The views expressed here are the author’s alone. 

Graphics created by Juni Kim. Cover image created by Juin Kim from photos on Gage Skidmore’s photostream on flickr Creative Commons.

By Phil Eskeland 

“As Vice President… [Joe Biden] backed the horrendous South Korea trade deal, which took many jobs from our country which I reversed and made a great deal for our country.”

Remarks of President Donald J. Trump upon accepting the Republican nomination for President, August 27, 2020 (President’s extemporaneous remarks in italics)

Last Thursday night, President Donald Trump accepted the Republican nomination for a second term as President of the United States.  Every speech at political events contains embellishments, and this one was no exception.  President Trump’s remarks returned to the main themes that have animated his political beliefs for most of his lifetime, particularly on implementing his vision of fair and reciprocal trade.  In his list of alleged “blunders” committed by Vice President Joe Biden over the previous 47 years of public service, President Trump not surprisingly focused on four trade policy matters that represented the bipartisan and establishment consensus at the time – Biden’s votes, as a U.S. Senator, for the North American Free Trade Agreement (NAFTA) and China’s accession into the World Trade Organization (WTO) and the Obama-Biden Administration’s actions on negotiating the Trans Pacific Partnership (TPP) and passing the Korea-U.S. Free Trade Agreement (KORUS FTA) into law.

President Trump generally stuck to his prepared remarks throughout most of his acceptance speech, and only occasionally adlibbed, usually for emphasis.  However, the President improvised the last section of the sentence dealing with KORUS in which he said he “reversed” the trade agreement and then “made a great deal for our country.”  Yet, most of the underlying text of the original KORUS FTA remains unchanged.  In 2018, the Trump Administration negotiated a handful of modest adjustments to the agreement, most notably an extension of the 25 percent U.S. tariff on imported trucks from Korea for another 20 years and allowing more U.S. motor vehicles and parts to enter South Korea based on meeting U.S. environmental and safety standards.  Separate from the minor modifications to KORUS, Korea also agreed to voluntarily limit its exports of steel to the United States to avoid higher American import duties.  Since the adoption of this side agreement, the volume of Korean steel exports to the U.S. has declined by 31 percent or by $523 million in value, but possibly at a cost of higher prices and increased scarcity of supply to U.S. steel-using manufacturers.

Despite this difference on steel, the overall trend in the U.S.-Korea trade relationship continued to flourish after the implementation of the KORUS FTA in 2012, with most years showing a growth in U.S. exports of both merchandise goods and services to Korea.  At the same time, the bilateral trade deficit between the U.S. and South Korea declined to a low of $4.5 billion in 2018 after initial increases due to factors unrelated to KORUS, including falling agricultural commodity prices.  If one continues to use the metric from the Department of Commerce that every $1 billion in U.S. exports supports approximately 5,700 American jobs, the nearly $20 billion growth in U.S. exports to South Korea since 2012 created or supported approximately 112,000 U.S. jobs, beating the Obama Administration’s prediction that KORUS would support 70,000 U.S. jobs in 10 years.  This is on top of the $36.6 billion in new investment from Korea that has come into the United States since 2012 to employ at least 58,000 Americans.  The results of KORUS are precisely the opposite of what was said last Thursday night because the facts show the accord produced more U.S. exports and jobs as intended.

After the Trump Administration’s “great deal” with Korea to modestly modify KORUS in 2018, the bilateral goods and services trade deficit crept back up to $7.4 billion in 2019.  This is not the Administration’s fault because U.S. goods and services exports to Korea grew in 2019.  However, American consumers continued to purchase Korean products at a higher rate, ranging from advanced technology products, such as Samsung smartphones, to higher-value auto imports from Korea, such as the Hyundai Genesis luxury car or Kia’s Niro electric/hybrid vehicles.  The larger bilateral U.S.-Republic of Korea (ROK) trade deficit serves as another reminder that using trade policy as the sole tool to lower the trade deficit is bound to fail because larger macro-economic forces are at play.  The U.S. should continue to promote exports and combat illegal trade practices, but the impetus for these policies should not be to reduce the trade deficit because that is a fools-errand.  As the independent Congressional Budget Office (CBO) tactfully concluded in its 2000 report to Congress on the causes and consequences of trade deficits “…if one nevertheless wanted to reduce the (trade) deficit, trade policy would not be a good way to accomplish that goal.”  Would the U.S.-ROK trade deficit be even higher without the President’s action in 2018?  Perhaps, but no one can accurately predict the alternative outcome.

As the presidential campaign continues, President Trump and his team should drop the hyperbolic language from the past about the KORUS FTA, closely analyze the updated trade statistics to modify the rhetoric, and use this agreement as a model to encourage other countries to enter trade deals with the United States.  The facts show the KORUS FTA has worked as intended.  Instead, the focus should be on the future efforts to knock down barriers to trade so that the U.S. can return to historically high levels of export growth once the global pandemic is over.

Phil Eskeland is the former Executive Director of KEI and Policy Consultant at Gammon & Grange, P.C. The views expressed here are the author’s alone. 

Image from Wikimedia Commons.

By Randall S. Jones

Following a 5.0 percent decline in the first quarter of 2020, real GDP fell 12.7 percent at a seasonally-adjusted annual rate (saar) in the second quarter (table below), the largest decrease since the Asian financial crisis more than two decades ago. Despite Korea’s success in limiting the spread of the coronavirus and its large-scale fiscal response to boost the economy, it was unable to escape the economic impact of the pandemic and avoid a recession.

Stabilization of domestic demand, while exports collapsed

Private consumption rebounded with growth of 5.5 percent (saar) in 2020Q2, reflecting strong purchases of durable goods. Consumption was supported by the easing of some pandemic-related restrictions on economic activity and the government’s cash payments to households beginning in May. The payments were 1 million won ($833) to households with four or more members. Government consumption also increased in 2020Q2, supported by the first two supplementary budgets. Consequently, final domestic demand increased 2.9 percent, despite a decline in fixed investment that included both construction and facilities investment.

However, exports fell 51.7 percent (saar), led by declines in shipments of cars and petroleum products. With imports falling by only half as much as exports, net exports made a huge negative contribution of 15.1 percentage points to GDP.

On the production side of GDP, the drop in exports had a severe impact on manufacturing output. It fell 31.5 percent (saar) in 2020Q2, even though sales of goods in Korea returned to pre-pandemic levels by May, according to data on credit card transactions. Service-sector output fell 4.3 percent in the April to June period, compared to a 9. 3percent drop in the previous quarter. While the service sector is recovering, credit card payments for services remain about 10 percent below historical norms. As in other countries, the recovery of services lags behind that of goods, reflecting the fear of physical contact during the pandemic.

An economic rebound in the second half of 2020

After the release of the 2020Q2 data, Nam-ki Hong, the Minister of Economy and Finance, said that “It’s possible for us to see a China-style rebound in the third quarter as the pandemic slows and activity in overseas production, schools and hospitals resume”. Chinese GDP jumped 11.5 percent on a quarter-on-quarter basis in 2020Q2 following a 10 percent decline in the first quarter.

Fiscal policy will help support an economic rebound. On July 3^rd, the National Assembly passed the third supplementary budget, which amounted to 35.3 trillion won (1.9 percent of GDP), the largest single extra budget ever approved. The government expects to spend around three-quarters of the budget during the third quarter of 2020. Combined with the first and second supplementary budgets (11.7 trillion won and 12.2 trillion won, respectively), extra spending in 2020 amounts to 59 trillion won.

The third supplementary budget focuses on employment growth by extending for three months a program that helps companies keep employees on their payroll by covering 90 percent of the wages of workers on paid leave.  Additional funds were allocated to the employment insurance fund, which is overwhelmed with applications for benefits. The government estimates that around 8.9 million workers will benefit from the third supplementary budget, including 3.2 million workers who are at risk of losing their jobs, 1.0 million small business owners and 4.7 million receiving quarantine support.

The Korean New Deal will be supported by 6.3 trillion won of investment from the third supplementary budget. This initiative for 2020-25 is aimed at transforming the economy from a fast follower to a leader, from a carbon-dependent economy to a green economy, while making society more inclusive. The New Deal includes a Digital New Deal (12 projects), Green New Deal (8 projects) and stronger social safety nets (8 projects). 

GDP growth for 2020 is projected to be negative

The government is hoping that policies will keep GDP growth positive at 0.1 percent in 2020. However, the Bank of Korea said at its July 16 monetary policy meeting that “GDP growth this year is likely to be lower than the May forecast of minus 0.2 percent.” The next projection by the central bank is expected at the end of August. According to the IMF’s June outlook, Korea’s GDP will fall by 2.1 percent in 2020, though this is a relatively modest decline compared to its forecast of an 8.0 percent contraction in the advanced economies.

With the rapid implementation of the third supplementary budget, the decline in Korea’s GDP in 2020 is likely to be less than 1 percent. For example, taking the OECD’s estimates in June for GDP growth in the third and fourth quarters of this year (9.9 percent and 8.2 percent, respectively at an annualized rate), GDP would decline by around 0.7 percent in 2020. Such an outcome assumes that Korea continues to be successful in coping with the coronavirus. In fact, the number of new cases is limited to around 50 per day. Thus far, Korea has limited the total number of infections to around 14,000 and the number of deaths to around 300, relatively low numbers by international standards.

The wide range of forecasts for Korea in 2020 reflects the great uncertainty about the impact of the pandemic and the risk of a second wave of the coronavirus. Given the importance of exports in the Korean economy, the pace of recovery depends to a large extent on the depth and length of the global recession, which is depressing investment and employment in Korea.

Randall Jones is a Visiting Fellow at Columbia University and a Non-Resident Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Image from xoxoryan’s photostream on flickr Creative Commons.

By Troy Stangarone

North Korea’s decision to put in place strict border controls and quarantines at the onset of the COVID-19 outbreak in China continues to have a significant effect on trade as new March trade figures with China show even sharper declines than the figures for the January-February period.

According to China’s General Administration of Customs, North Korea’s exports to China fell to only $616,000 last month, down from a combined $10.7 million in January and February. This is by far the lowest monthly North Korean export figure to China since the United Nations began placing stricter sanctions on North Korean exports in 2016. The previous low was $9.4 million in February of 2018.

The drop in North Korean imports from China are nearly as drastic. In March, North Korean imports from China were only $18 million. This is down from imports of $197.4 million in the January-February period. Imports from China had previously not fallen below $89 million in February of 2019 since the stricter UN sanctions were put in place.

While China changed its reporting this year to combine January and February trade data, the March figures suggest that with the quarantine and border controls in place most of the trade early this year likely took place in January. Had China maintained monthly statistics, the February numbers would likely show a similar decline in North Korean trade with China.

With China beginning to reopen its economy these figures may rise, but as long as North Korea maintains measures to limit the potential spread of COVID-19 we should expect trade figures to remain below the normal levels that have developed under sanctions.

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

Photo from Prince Roy’s photostream on flickr Creative Commons.

By Stephan Haggard and Jeongsoo Kim

The economic success of the Asia-Pacific has rested in no small measure on its finely-tuned supply chains. These global production networks are coming under stress from the COVID-19 crisis, but also from the new political economy of trade. The U.S.-China trade war has had as one of its stated objectives a “decoupling” from China, which of necessity means reducing American dependence on Chinese suppliers.

The history controversy that sparked the downward spiral in Japan-Korea relations threatens a similar eventuality. We now have interesting survey data from Korea on how these effects operate. The data suggest that uncertainty about even small amounts of trade in highly-specialized products can loom large for the businesses involved. Yet it also shows that governments and firms respond to these risks in ways that may harm firms in the sanctioning country.

The Japanese Controls

It is important to note that the measures undertaken by Japan did not take the form of outright export bans; rather, they involved a tightening of administrative procedures and the suggestion—or threat—that such controls could in fact be instituted. In July of 2019, the Ministry of Economy, Trade, and Industry of Japan announced an “update of METI’s licensing policies and procedures on exports of controlled items to the Republic of Korea.” The update stated that Japan would restrict the export of Fluorinated Polyimide, Photoresist, Hydrogen Fluoride, and their related technologies by mandating an individual review for the three items (METI, July 1st, 2019). The three items share two similarities. First, they are critical materials for producing semiconductors and OLED screens, two crucial industries in South Korea. Second, the major Korean producers in this space–Samsung, SK Hynix, LG—have built complex supply chains that rely on these specialized inputs.

As a result of these measures, Japan effectively blocked export of liquid Hydrogen Fluoride for more than four months until it was finally approved in mid-November. Photoresist manufacturers were permitted to export in August for the first time, and Japan mitigated the export control on this product by moving from individual review to a special general bulk license in December. Japan resumed permissions to export Fluorinated Polyimide in September.

At the same time these new screening procedures were introduced, the METI also initiated “the public comments process for the amendment of the Cabinet Order removing the Republic of Korea from the Appended Table Ⅲ (so-called “white countries”) of the Export Trade Control Order” (METI, July 1st, 2019). After the public hearing period ended, Japan eventually removed South Korea from the white list and downgraded South Korea from a “preferred” to a non-preferred trade partner on August 2nd, 2019. As a result, Japanese exporters to South Korea no longer enjoyed a General Bulk Export License. Instead, they were required to seek permission from Japan’s export control authorities unless they acquired a Special General Bulk Export License, which requires more rigid standards than the General Bulk Export License.

In addition to the list control, Japanese authorities also could regulate any export and technology transfer to South Korea under a more general “catch-all” control when deemed necessary (METI, August 2nd, 2019). The potential magnitude of these controls—although not actually invoked–was particularly wide-ranging. According to Korean sources, total trade volume that potentially fell under the list and catch-all controls was about half of all Korean imports from Japan. Furthermore, among 4,898 items which were under the catch-all controls in 2018, 707 items were products in which Korea depended on Japan for more than 50% of imports of the product; Korea was completely dependent on Japan for 82 of these items.

A survey conducted by the Korea Institute for Industrial Economics and Trade (KIET) in September 2019, asked 1,051 South Korean manufacturers about the effects of the measures, and nearly 80% said that they anticipated no effects or that they were even positive (no effect [77.8%], slightly positive [1.0%], very positive [0.4%]). Only 10.8% of manufacturers reported a slightly negative effect, with 3.5% answering they would experience strongly negative effects (민성환, 강두용 2019, 22).

Yet when we drill down into the most-affected industries, the picture changes. The table below looks in more detail at the five major industry classifications anticipating the most negative effects; the table also provides more detail on the particular problems they foresaw. Fully 60% of semi-conductor manufacturers polled foresaw production disruptions of sub-contractors, even though an analysis we conducted of the Korean semi-conductor sector showed no statistically significant change in profitability between the 3^rd quarter of 2018 and the 3^rd quarter of 2019. 44% of respondents from the chemical industry expected supply interruptions while the rechargeable battery industry showed a particularly high response rate with respect to “increased uncertainty.”

The Perverse Effects of Controls

It has long been known that sanctions are of necessity costly to the sanctioning country. And there is evidence in this regard for Japanese firms in these sectors as well. For example, during the first month of Japan’s new export measures, Japanese Hydrogen Fluoride producers suffered a sharp decline in their stock prices. The stock price of Morita Holdings Corporation was 1,942 JYP on July 1^st; it fell to 1,552 JYP on August 12^th. The price of Stella Chemifa dropped from 2,930 JYP on July 1^st to 2,460 JYP on August 7^th (Yahoo Finance), declines of 20.08 and 16.04 percent respectively.

Of greater long-run interest is the fact that South Korea did not take the restrictions lying down. The episode sparked a rethink of its reliance on Japan for intermediate inputs and components, new efforts to diversify sources of supply and even import-substitution measures. South Korea’s National Assembly passed a supplementary budget measure to support substituting for Japanese products on August 2^nd, 2019. Nor were the sums trivial: 65 billion won ($54.15 million as of 1 March 2020) was allocated to technology development, 28 billion won ($30.86 million) for reliability tests, and 32 billion won ($35.28 million) for evaluation of mass production of critical intermediate inputs. The South Korean government also increased budget support related to material and components from 827 billion won ($911.96 million) in 2019 to 2.1 trillion Won ($2.315 billion) in 2020, and provided loans worth of 2.5 trillion Won ($2.75 billion) to support investing in foreign companies that have needed technologies (산업자원통상부 소재부품총괄과 2019, 3). In part as a result of these efforts, the Korean firm SoulBrain Co Ltd succeed in developing and producing Hydrogen Fluoride of “12-nine” purity (0.999999999999 pure). South Korea’s Minister of Trade, Industry, and Energy went so far as to publicly announce that South Korea no longer depends on Japanese Hydrogen Fluoride (Song 2020).

Nor were these effects limited to gains for Korean companies. DuPont, the U.S. based chemical firm, announced in January of 2020 that it decided to invest $28 million to build Photoresist production facilities in South Korea (The Korea Herald 2020).

Conclusion

As trade and foreign direct investment has slowed globally in the last three years, globalization has been dealt a further blow by the increasing politicization of global supply chains. Even putatively small administrative changes have highly disruptive effects on the industries in question, and precisely because of the specialization that such supply chains permit. Yet these measures also carry risks for the sanctioner that the U.S. needs to consider as it goes down a more nationalist route. Being an unreliable partner has costs as foreign governments and firms seek to reduce their risks.

Stephan Haggard is the Lawrence and Sallye Krause Professor of Korea-Pacific Studies, Director of the Korea-Pacific Program and distinguished professor of political science at the University of California – San Diego.  Jeongsoo Kim is a masters student at the School of Global Policy and Strategy, University of California, San Diego. He received his Bachelor’s Degree from the Republic of Korea Naval Academy. The views expressed here are the authors’ alone.

Photo from the Port of Tacoma’s photosream 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

• The Blue House announced that 17 countries have officially requested testing kits from South Korea.
• According to the Ministry of Food and Drug Safety, seven companies have been licensed to export their coronavirus testing kit. All companies authorized by the government were small and medium-sized enterprises (SMEs).
• These SMEs had begun developing diagnostic kits in January and had obtained export permits from the Ministry of Food and Drug Administration in February.

Implications: Going against the long-held assumption that large companies are more competitive exporters, SMEs are receiving positive media attention for their quick production of export-ready coronavirus testing kits. News sources have contrasted the speed of SME pharmaceutical companies to that of their larger peers such as Celltrion, which only began developing testing kits in March. The media narrative attributed this agility to more efficient decision making processes that SMEs enjoy.

Context: SME pharmaceutical companies have contributed to developing responses to past public health crises. For example, Kogenebiotech developed diagnostic products during the H1N1 outbreak in 2009 and the MERS outbreak in 2015, supplying them to national organizations and medical institutions. The company used these experiences to further burnish their capacity to address the ongoing coronavirus outbreak. But the media only recently began casting a more positive spotlight on these companies – perhaps due to the scale of the ongoing public health crisis.

Korea View was edited by Yong Kwon with the help of Gordon Henning, Soojin Hwang, Hyungim Jang, and Ingyeong Park.

Picture from flickr account of syed zaheer

By Troy Stangarone

According to a recently leaked UN 1718 Committee report, North Korea exported 3.7 million metric tons of coal in the first eight months for 2019 despite UN sanctions prohibiting North Korean coal exports. Earning the regime $370 million, these exports help explain how Pyongyang has been able to finance its trade deficit. Moreover, it potentially disproves the widely-held assumption that North Korea’s smuggling activities are untenable in the long-term because of the added costs.

The UN estimates suggest that illicit exports of North Korean coal increased by nearly 300 percent by value and volume from May through August compared to the first four months of the year.

The UN has not released full year data, but if North Korean exports of coal in the four months of 2019 merely declined to the average of the prior eight months that would suggest that North Korea potentially earned an additional $185 million from coal exports for a potential total of $550 million for the full year. It would also suggest that North Korea may have exceeded the cap on value initially placed on Pyongyang’s coal exports in 2017 before the full ban was put in place.

The report values North Korean coal exports at approximately $100 a metric ton, which is in line with the value placed on illicit North Korean coal exports in the 1718 Committee’s previously released report which estimated that North Korea had exported 930,000 metric tons in the first four months of 2019.

Traditionally North Korea has earned less from its coal exports to China per metric ton than exporters such as Australia, which is China’s largest source of imported coal. At $100 per metric ton, however, it suggests that North Korea is not taking a significant discount on its coal exports from the sanctions.

Even prior to sanctions, North Korea received less per metric ton than countries such as Australia. In 2016, the last year before sanctions were placed on North Korean coal exports, Australian coal exports averaged $79 per metric ton while North Korean coal exports to China averaged a little under $53 per metric ton.

Full year trade data by commodity for 2019 is not yet publically available from China or Australia. However, in 2018, exports of Australian coal to China averaged $130 per metric ton. If 2019 prices are ultimately similar, that would suggest that dollar per metric ton spread between Australian coal and North Korean coal has largely remained the same, while the percentage price that North Korea receives relative to Australian coal has actually improved from 67 percent to 77 percent.

With UN sanction on a range of North Korean exports in addition to coal, there has been a significant decline in North Korean exports. In the case of China, North Korea’s largest trading partner, exports declined from $1.7 billion in 2017 to $215 million in 2019 as a wider range of sanctions were implemented, while imports only declined from $3.3 billion to $2.6 billion over the same period.

If confirmed, this would help explain how North Korea has been able to maintain a relatively high level of imports from China despite its official export earnings having declined so precipitously. One theory has been that North Korea was spending down its foreign reserves to cover its trade deficit with China. However, if UN estimates are correct, North Korea’s trade deficit can be partially explained by the revenue generated from Pyongyang’s illicit exports of coal exports.

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

Graphics by Juni Kim, Senior Manager for Operations and Technology, Korea Economic Institute of America.

Photo from Kentucky Photo File’s 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

• On February 12, Deputy Prime Minister and Finance Minister Hong Nam-ki warned that the coronavirus could enhance uncertainties in the domestic labor market. Report from the Korea Development Institute echoed these concerns.
• Statistics Korea revealed that the number of jobs occupied by people in their 40s declined for 51 consecutive months.
• Significant share of the new jobs added in 2019 went to workers who were above the prime working age (25-54).

Implications: Economic uncertainties created by the U.S.-China trade war and the coronavirus outbreak revealed that skilled workers in South Korea’s manufacturing sector are more vulnerable to shocks in the global market. There are two drivers that place skilled manufacturing workers in this precarious position. First, internal changes in the manufacturing sector led to increased automation in domestic plants while more labor-intensive production was outsourced to emerging markets. Second, companies are more likely to terminate skilled workers in their 40s – generally the highest paid workers in the sector – when looking to reduce overhead cost during downturns. Reflecting these vulnerabilities, preliminary data showed that much of the job creation in 2019 went to workers who are outside prime working age. Further shocks could come from work stoppages by Chinese manufacturers due to the coronavirus.

Context: Through expanded fiscal spending, the South Korean government has increased the overall number of jobs, but these new opportunities have gone largely to the elderly. Data from August 2019 showed that South Korea’s low unemployment rate obscures the fact that job seekers above the age of 60 accounted for 391,000 out of 452,000 new jobs created during the survey period, while employment declined among the 40-49 age group. The number of people who have reached retirement age but are staying in the workforce also hint at the gravity of elderly poverty in the country – the average age of households in the bottom 20% of income earners is 63.4.

Korea View was edited by Yong Kwon with the help of Gordon Henning, Soojin Hwang, Hyungim Jang, and Ingyeong Park.

Picture from LG Electronics flickr account

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

• South Korea decided to expand the operational area of its anti-piracy unit already deployed in the Gulf of Aden to cover Hormuz Strait, without joining the U.S.-led International Maritime Security Construct (IMSC).
• The U.S. Government welcomed Seoul’s decision to expand operations to the Persian Gulf.
• Iran has expressed “concern” about the troop deployment, but also noted that it “understands South Korea’s decision.”
• There was some domestic push back; however, according to polls, 51.9 percent of South Korean support the troop deployment.

Implications: The South Korean government’s decision to dispatch troops to the Strait of Hormuz exemplifies South Korean idea of “balanced” diplomacy – accommodating different demands of surrounding powers while also avoiding any direct conflicts. South Korea partially conformed to the American request by expanding the Cheonghae Unit’s operational zone, but minimizing the risk of directly provoking Iran by not joining the IMSC.

The government also bypassed the difficulty of getting domestic approval for overseas troop deployment by framing it as an “extension” of the existing operation, rather than commencing a new mission. According to the law, the government needs parliamentary approval for overseas troop deployment. However, such consent is unnecessary for expanding the operation zone of a deployed unit.

Context: South Korea has managed to achieve a relatively successful balancing act between the demands of its most important ally and a potentially important future trade partner. South Korea was the 4th largest exporter to Iran in 2011. After the conclusion of the 2015 Iran nuclear deal, Korean exports to Iran grew from $6.1 billion to $12 billion in 2017. South Korea also imported approximately 230,000 barrels per day from Iran in 2011. The reimposition of U.S. sanctions on Iran in 2018 suspended this deep commercial relationship, but Seoul likely hopes for a speedy resolution of the tensions and the lifting of sanctions to reengage the growing consumer market in Iran.

Korea View was edited by Yong Kwon with the help of Gordon Henning, Soojin Hwang, Hyungim Jang, and Ingyeong Park.

Image originally appeared on a Korea Herald article from March 12, 2019

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.