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

• At the UN Climate Action Summit in New York, President Moon announced his plan to double Seoul’s funding of the Green Climate Fund and host an international climate summit in South Korea.
• The government’s recently released data showed that greenhouse gas emissions reached a record high in 2017.
• South Korea’s coal consumption increased by 2.4% in 2018, the only country to do so among OECD members.

Implications: While President Moon’s pledge at the UN was consistent with his broader effort to reduce South Korea’s carbon emissions, Seoul faces the challenge of building a greener economy without nuclear power or whole-hearted private sector support. As a result of Moon’s domestic pledge to phase out nuclear energy, the Korean utility operators had no choice but to rely more heavily on coal and LNG in the past two years.

Meanwhile, South Korean firms like Doosan, Samsung, and Hyundai have won lucrative bids to build coal-fired plants in Southeast Asia. In fact, South Korea is the second-largest investor in the global coal-financing market. These realities hold up Korea’s push to become a principal player in the struggle against climate change.

Context: Following the 2011 nuclear accident at Fukushima, activists began calling on the government to phase out nuclear power plants from South Korea. A 2012 scandal that revealed flaws in these plants’ safety protocols further exacerbated public anxiety around nuclear energy. Finally, a series of small earthquakes in 2016 reintroduced fears that an analogous accident to Fukushima could occur in South Korea. Cognizant of this pushback, the government pivoted its investment focus to renewable energy – but this is not expected to substitute coal output in the near future.

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

Picture from IAEA’s flickr account

By Yong Kwon, Soojin Hwang, and Rachel Kirsch 

The ongoing confrontation between the White House and U.S. Congress will likely engross President Donald Trump’s political attention in the months ahead. Given his central role in executing highly delicate negotiations with North Korea and high-stakes face-off over trade with China, the impeachment inquiry may affect the U.S. government’s execution of foreign policy. Two most recent cases of impeachment proceedings against an incumbent president provide insights into what domestic and international observers could expect going forward. 

Reviewing developments during the Nixon and Clinton administrations, domestic political scrutiny did not affect broader foreign policy visions. Simultaneously, the gravity of the foreign policy challenges confronting the respective administrations provided the White House with little cover from the legislature’s hostilities. Notably, already-empowered figures in both administrations enjoyed greater latitude to execute policies while the impeachment proceedings distracted Presidents Richard Nixon and Bill Clinton. However, these figures could not substitute the president’s role in mobilizing intra-governmental coordination. 

While the inquiry against the Trump administration is taking place in a very different political environment than what the Nixon and Clinton administrations faced, these cases provide a glimpse into what may be on the horizon.

On execution of foreign policy: Under Nixon and Clinton, key diplomatic engagements continued unabated during their respective impeachment proceedings. However, Congress placed more stringent oversight on foreign policy issues that had been flashpoints between the legislature and executive before impeachment proceedings, particularly areas that involved the allocation of resources. 

Despite the start of impeachment proceedings against Nixon by the House Judiciary Committee on May 9, 1974, the administration concluded an arms control agreement with the Soviet Union in June 1974. The Threshold Test Ban Treaty was accompanied by other agreements with Moscow that strengthened bilateral economic cooperation. Many conservative and liberal lawmakers expressed wariness towards Nixon’s easing of hostilities with the Soviet Union, but Congress did not (or could not) impede the administration’s engagements. 

However, Congress confronted the Nixon administration on long-standing disagreements. Notably, lawmakers rejected the Nixon administration’s request in 1974 to raise the ceiling on military assistance to South Vietnam. This was an extension of an ongoing dispute between the executive and legislature over U.S. commitment in Southeast Asia. As early as June 1973, when the investigation into Watergate had just started, Congress imposed a ban on any future U.S. military action in the region. 

Similarly, Clinton undertook significant foreign policy measures while facing an adversarial Congress. He led negotiations between Israel Prime Minister Benjamin Netanyahu and Palestinian leader Yasser Arafat in October 1998 despite the House of Representatives authorizing an impeachment inquiry earlier that month. 

Congress too acted more assertively to elevate its long-standing positions while the White House faced mounting public pressure. In September 1998, after Clinton publicly admitted that he had an affair, Congress blocked the administration’s request for increased funding for the International Monetary Fund to assist the containment of the Asian Financial Crisis. U.S. financial support had been a contentious issue that preceded the scandal. In December 1997, Clinton himself had called on Asian economies affected by the crisis to adopt greater macroprudential discipline as a condition for receiving external financial assistance. 

President’s use of foreign policy as a distraction from impeachment: Successive American presidents have been accused of employing foreign policy to distract the public from domestic challenges. Nixon and Clinton’s detractors also floated this theory during their respective impeachment proceedings. In both cases, however, foreign policy crises did not contribute to ameliorating the level of public scrutiny against the White House. 

The Nixon administration faced myriad foreign crises between 1972 and 1974, but Congress refused to be distracted from the ongoing investigation into the Watergate break-in. In fact, Congressman Less Aspin introduced legislation in April 1974 to preempt any efforts by Nixon “[to play] fast and loose with our national security during an impeachment trial.” This conscious bifurcation of foreign and domestic challenges by the legislature may have contributed to the impeachment inquiry continuing unabated through North Vietnam’s 1972 Easter Offensive against South Vietnam, the 1973 Yom Kippur War, and the 1973 oil crisis. 

Similarly, the Clinton administration’s decision to conduct airstrikes against Iraq in December 1998 delayed the impeachment vote from coming to the floor for four days but did not prevent the legislature from taking action indefinitely.  

Shift in foreign policymaking authority: When Nixon and Clinton faced impeachment proceedings, key figures in the administration were elevated to take the lead on foreign policy while the Oval Office focused on mounting a defense. However, these figures could not completely substitute for the president. Government resources could not be efficiently allocated to advance foreign policy aims because empowered personnel could not subordinate other federal agencies and their interests easily without central guidance from the president. 

During the Watergate scandal, Secretary of State Henry Kissinger was given so much authority that Washington Post correspondent Chalmers Roberts described him as a “surrogate president for foreign affairs.” Similarly, Treasury Secretary Robert Rubin was empowered to address the Asian Financial Crisis while Clinton dealt with the political blowback from his affair with Monica Lewinsky. Both figures, however, had a narrow purview and needed the support of other agencies to achieve policy objectives (i.e. aid to Israel in 1973 and pressure on Indonesia to adopt economic reforms in 1998). The president’s role remained essential.

These cases took place in their unique political environments and cannot be directly superimposed on ongoing developments. For example, both Nixon and Clinton enjoyed higher approval ratings than Trump when they initially faced their impeachment inquiries. Moreover, the impeachment proceedings against the two erstwhile presidents were not directly linked to their conduct of foreign policy, insulating this space from political scrutiny. In addition, Secretaries Kissinger and Rubin had been empowered before the crisis and carried the confidence of their peers in the administration. It is unclear if the same could be said about figures in the incumbent administration. Trump’s diminishing approval rating, the focus of the impeachment inquiry on his handling of foreign affairs, and the potential implication of Secretary of State Mike Pompeo in the scandal all point to a potential amplification of the challenges to the administration’s execution of foreign policy.

These caveats make the current crisis against Trump a unique case. Nonetheless, history shows what avenues might both constrain and sustain the administration’s ability to execute foreign policy. 

Yong Kwon is the Director of Communications at the Korea Economic Institute of America. Soojin Hwang and Rachel Kirsch are currently Interns at the Korea Economic Institute. The views expressed here are the authors’ alone.

Photo via the National Archives and Records Administration, public domain/CC0.

By Troy Stangarone

South Korea isn’t the only country that Japan feels has broken its trust. After years of investment in the United Kingdom based on the understanding that it would be a stable platform to export into the European Union, Asian investors find those investments now at risk from the United Kingdom’s decision to leave the economic bloc and its inability to manage the process. As countries deal with this change, South Korea has taken a decidedly more trade friendly approach than Japan.

With the United Kingdom set to leave the European Union, London needs to put in place new trade arrangements replace those that it will lose once it leaves the world’s largest common market. To achieve this, the United Kingdom has sought to roll over many of European Union’s trade agreements so that deals with those countries remain in place once the United Kingdom leaves the European Union.

Without these roll over agreements, the trade between the United Kingdom and its European Union FTA partners would return to same terms that countries default to under the WTO. As a member of the European Union the United Kingdom cannot negotiate separate trade deals until it formally withdraws. The roll over agreements allow the United Kingdom and its trading partners to maintain the benefits of the FTAs that currently exist with the European Union. To date, the United Kingdom has signed 13 agreements to roll over trade deals with other countries or economic blocs such as Central America. Its agreements with South Korea and Switzerland being the most significant.

While the United Kingdom has sought to roll over its agreements with Japan and South Korea, both are relatively modest trade partners for the United Kingdom. Aside from China, the United Kingdom does a relatively small amount of trade with countries in East Asia. South Korea only accounts for 1.1 percent of the United Kingdom’s total trade. Japan was only the United Kingdom’s 14^th largest export destination in 2018 with $8.4 billion in exports, while South Korea was its 15^th largest export destination with $7.8 billion in exports. This contrasts with its $65 billion in exports to the United States or $46.7 billion in exports to Germany.

The United Kingdom imports relatively more from East Asia than it exports. However, the United Kingdom was still only the 16^th largest export destination for South Korea and the 12^th largest export destination for Japan. In 2018, it imported $12.9 billion worth of goods from Japan and $5.2 billion from South Korea. If China is excluded, the only two countries that exported more to the United Kingdom than South Korea from East Asia were Vietnam, which only exported a small amount more, and India which exported $9.7 billion.

In approaching their future trading relations with the United Kingdom, South Korea and Japan have taken different approaches. South Korea has agreed to a two year roll over deal that will allow the two sides to negotiate a more permanent trade agreement once the United Kingdom has left the European Union.

In contrast to South Korea, Japan is refusing to sign a roll over trade agreement in the belief that it can negotiate better terms with the United Kingdom on its own than it received in negotiating with the European Union as a whole. Despite the fact that Japanese firms will face increased barriers in the British market until a new deal is reached.

With the United Kingdom leaving the European Union, Japan’s move is what London is likely to see once it is no longer a part of the European Union – countries looking to gain more favorable trade deals with the United Kingdom than they would have gained with the European Union as a whole. London will simply have less leverage on its own than it did as part of a larger bloc.

In the case of Japan, it is speculated that it will seek to reach an agreement that leaves the United Kingdom with less access to the Japanese market than it enjoys now. While that would be a disappointing outcome for the United Kingdom, and counterintuitive to Japan’s desire to be a leader on free trade, London may not have the leverage to object. It is unlikely to secure a favorable deal from the United States and with the potential of a no-deal Brexit to sour relations between London and Brussels, it may face difficulty in securing a new deal with the European Union. Taking lesser access to the world’s third largest economy may just be a price it has to pay as Tokyo will be in a stronger position to manage a loss of trade from Brexit.

In contrast, by agreeing to a two year extension, South Korean firms are unlikely to see disruption in the British market while a new deal is being negotiated. It is unclear what objectives Seoul has for its future talks with London, but it will be interesting to see if it seeks to limit access to its domestic market in the same fashion as Japan or expand market access in the United Kingdom.

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 Graeme Maclean’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

• President Trump released a memorandum calling for South Korea to renounce its developing-country status in the World Trade Organization (WTO).
• In response, the Ministry of Trade proposed removing the status, pointing out that South Korea no longer received benefits from retaining the status.
• Meanwhile, the Ministry of Agriculture argued against relinquishing the status, which helps South Korea protect its rural sector.

Implications: The Korean government’s decision to renounce its status as a developing country at the WTO will reveal that the Moon administration has the political capital to appease the Trump administration. As ties with Japan continues to deteriorate, there is a premium on maintaining the status quo with Korea’s other key trade partners. Ties with the United States have already been strained over Seoul’s withdrawal from its intelligence-sharing agreement with Japan. In addition, tensions may arise in the near future as Korea and the United States restart difficult negotiations on cost-sharing for U.S. troops deployed on the peninsula. In this environment, Seoul’s decision on its WTO status will reveal whether the Moon administration has the domestic political space to impose additional burdens on farmers to secure a favorable relationship with the Trump administration.

Context: Currently, WTO status is determined by self-declaration, but the Trump administration identified four standards it believed should be criteria for exclusion from developing-country status. South Korea meets all four of them. The White House also accused other countries of maintaining a dishonest status at the WTO, and some countries have already begun to change. Brazil, for instance, relinquished its status as a developing-country in the WTO in order to be considered for membership in the OECD.

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

The picture is from the World Trade Organization’s Flickr account

By Troy Stangarone

On August 2, the United States and the European Union (EU) announced an agreement to provide greater market access for U.S. beef to the EU.

Prior to the August 2 agreement between the United States and the EU, the EU had a ban on the production and sale of hormone treated beef dating back to the 1980s. The United States eventually won a World Trade Organization (WTO) case against the EU and the two sides reached a deal in 2009 that allowed the EU to maintain its ban on hormone treated beef but that also created a 45,000 metric ton import quota for beef that met EU standards with the intention that it would largely be filled by U.S. ranchers, but in reality has been largely filled by ranchers from other countries.

Under the new agreement, the United States will now have its own duty free tariff rate quota that will allow it to ship 18,500 metric tons annually that will rise over seven years to 35,000 metric tons. This is estimated to increase the value of U.S. exports from $150 million now to $420 million when the agreement is completely phased in.

The United States had its own beef issues previously with South Korea as a result of a case of BSE in the United States that resulted in U.S. beef being banned from South Korea. Those restrictions were partially lifted to allow boneless beef under the age of 30 months as a condition to begin negotiating the KORUS FTA only to see shipments later suspended. U.S. ranchers now operate under a commercial agreement that allows both boneless and bone-in beef under the age of 30 months to be shipped to South Korea.

Today, the United States exports nearly $1.7 billion a year in beef to South Korea, even though Seoul’s tariff on U.S. beef will not be completely eliminated under the KORUS FTA until 2027. As a country with a population of almost 52 million compared to the 508 million that live in the EU (prior to Brexit), South Korea will continue to consume more U.S. beef than much larger EU even after this agreement is in place.  In fact, in 2018 the EU imported $13.5 billion in agriculture from the United States while the smaller South Korea imported $8.3 billion.

While the additional access to the EU is important for American ranchers, it demonstrates the importance of South Korea as an export partner for U.S. farmers and ranchers.

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

Photo from the White House photo stream on flickr Creative Commons.

By Troy Stangarone

Last week two oil tankers were attacked in the Gulf of Oman. The attack comes after four tankers were attacked in the Persian Gulf in May. While the United States has argued that Iran is behind the most recent attacks, the growing confrontation between the United States and Iran has deeper implications for South Korea.

As a country without substantial domestic energy resources, South Korea is highly dependent upon foreign imports for its energy supplies whether it be oil and natural gas, coal, or the nuclear fuel to run its nuclear power plants.

South Korea uses petroleum and other liquid based fuels for 44 percent of its energy consumption, including for fuel for transportation, power generation, and its petrochemical sector. Liquefied Natural Gas (LNG) accounts for another 14 percent of South Korea’s energy consumption and is used in power generation, transportation, and other sectors.

South Korea’s dependence on imports for energy is also a dependence on the Middle East for imports of petroleum. In 2018, 72.9 percent of South Korea’s crude petroleum imports by value came from inside the Strait of Hormuz. South Korea’s purchases of LNG tend to be more diversified, about 45 percent are also from the Middle East.

With imports from Iran in 2018 beginning to decline from the resumption of U.S. sanctions, to increasing imports from the United States, Russia, and few others outside of the Middle East, South Korea’s imports from the region 2018 were down from 82 percent in 2017.

The significance of the Strait of Hormuz, and South Korea’s dependence on suppliers inside it, is that it is the narrow passage way which divides the Persian Gulf and the Gulf of Oman. This is a critical transit point for global energy exports as 30 percent of the world’s oil exports come from the Middle East. It also boarders Iran, which has threatened to close if the U.S. tries to block Iran’s access to the strait. Iran has also threatened to close the strait in the past.

If Iran attempted to close the Strait of Hormuz, it would have significant implications for South Korea.

South Korea’s dependence on the region for such a significant amount of its energy consumption makes it susceptible to the current tensions in the Middle East in terms of price and supply. After an initial spike in the price of Dubai crude, the benchmark for South Korean oil imports from the Middle East, after the most recent attack on oil tankers markets seem to have calmed. However, some analysts have suggested that prices of Brent crude, the benchmark for the United States, could rise to $100 a barrel from its current price of around $62 today[1].

The prospect for the current tensions between the United States and Iran to grow into a wider conflict will only be one factor on global energy prices. With the current U.S.-China trade tensions dampening global growth, demand for petroleum could decline and act as a counter weight on prices to U.S.-Iran tensions.

If current tensions between the United States and Iran were to escalate to a wider conflict, the supply of oil on global markets would play an important role in maintaining prices, but with the U.S. also trying to cut off Venezuelan oil exports global oil markets could be tighter than expected.

The ability of the United States to build a coalition to protect ships transiting near Iranian territory would also play a factor in the availability of supply and the stability of price. If the United States was unable to build a coalition to defend oil and LNG shipments from the Middle East, South Korea could find itself facing both rising energy prices and an energy shortage if supplies from the Middle East were disrupted.

In the short-term there is little that South Korea can do to insulate itself from instability in the region, but that also means it has a significant interest in the United States and Iran avoiding a wider conflict in the dispute over Iran’s nuclear program. Over time continuing to diversify its supply and moving more towards renewable energy would help to reduce South Korea’s susceptibility to the unpredictability of the Middle East.

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

Graphics by Juni Kim, Program Officer at the Korea Economic Institute of America.

Photo from the Official U.S. Navy Page’s photostream on flickr Creative Commons.

[1] Dubai crude tends to be more expensive than Brent crude, but most of the analysis is done in Brent crude prices.

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 Kyle Ferrier

Following President Trump’s decision to re-impose sanctions on Iran last May, the White House announced last week it will not be extending waivers on sanctions to countries importing Iranian oil. South Korea is one of only eight countries to be have been granted a waiver, which took effect as U.S. secondary sanctions went into force in early November and are now set to expire on May 2. Faced with this inevitability – though it may have come sooner than anticipated – Seoul’s efforts to diversify oil imports so far already suggest U.S. oil producers will play a key role in making up for the blockage of Iranian imports.

Demand for oil in South Korea has been growing in recent years, all of which must be met with imports. Total crude oil imports grew over from $44.3 billion in 2016 to $80.3 billion in 2018, making South Korea the fifth largest oil importing country last year. This demand has continued into 2019 – the volume of oil imports for the first three months this year is higher than it was during the same period last year.

Before the U.S. withdrawal from the Joint Comprehensive Plan of Action last spring, Iran was South Korea’s third largest source of oil. In 2017, Iran’s $7.5 billion in crude oil exports to South Korea were only behind Saudi Arabia’s $17 billion and Kuwait’s $8.3 billion. However, from September to December, 2018, Seoul cut off oil from Iran in response to Trump’s decision to reintroduce sanctions on Tehran. As a result, Iranian exports to South Korea last year only totaled $3.9 billion, dropping it down to the eighth largest provider of oil to South Korea.

Seoul has reopened the spigot since January, but the flow of Iranian oil has been relatively modest. From January to March, South Korea imported $1.2 billion in oil from Iran. The April imports will likely provide the final figure for the year, but, even with numbers suggesting a last big push before the May deadline, it seems unlikely to come close to last year’s total.

During the period of Iran’s diminishing exports, no other county among the largest exporters of oil to South Korea gained as much as the United States. The $4.5 billion in U.S. oil exports to South Korea last year was a 520% jump from 2017. The numbers for 2019 continue to be promising as the $1.8 billion in U.S. oil exports through March already represents an over 360% increase from the same period last year.

U.S. Secretary of State Mike Pompeo’s remarks that the U.S., Saudi Arabia, and the U.A.E will help to offset the losses from Iranian trade further provides reason to be bullish on U.S. oil exports to South Korea, but there also limitations.

Iranian and American crude oil are not perfect substitutes. There are some American sources that produce oil similar to that from Iran, but at a much lower rate. These may also be needed for more domestic consumption in the U.S. in the face of limited oil supply from Mexico and Canada and the now completely cut off supply from Venezuela after new sanctions enacted in in January. That many South Korean refineries are set up to specifically process Iranian oil will also add to the cost of the adjustment.

Still, the growing demand for oil in South Korea and the removal of a major competitor from the field – irrespective of the politics behind the decision – bodes well for American producers, now churning out more oil than any country thanks to the Shale Revolution.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Enrico Strocchi’s photostream on flickr Creative Commons.

By Phil Eskeland

The U.S. Department of Commerce released its monthly trade data for January, which encompassed 4^th Quarter 2018 statistics on trade in services with 15 individual countries, including South Korea.  Once again, the U.S. maintained its bilateral trade surplus in services with Korea because of yet another record-level of U.S. service exports to South Korea, totaling $24.5 billion for all of 2018.

In addition, the U.S. Census report revealed that the combined goods and services bilateral trade deficit between the U.S. and South Korea has dropped below 2011 levels, the year prior to the implementation of the Korea-U.S. Free Trade Agreement (KORUS FTA).  As noted in an earlier blog, record levels of U.S. merchandise exports to Korea, particularly the dramatic rise in the sale of oil and gas products to Korea, significantly contributed to the decline in the bilateral trade deficit.  But Korea’s continued purchase of U.S. service products, including a steady level of high numbers of travelers from Korea to the United States, contributed to the lower bilateral trade imbalance as well.  Now, there are eight more countries with a higher bilateral goods and services trade deficit with the United States than Korea, including France, Italy, and Taiwan.

As more information about trade flows in 2018 comes in throughout the year, particularly on data related to travel and tourism, the numbers may alter.  However, this achievement in lowering the bilateral trade deficit between the U.S. and Korea was accomplished before any changes to the revised KORUS agreement went into effect last January.  The U.S.-Korea bilateral trade deficit has declined by 71 percent from its height in 2015.  This reveals that the free market and consumer choice were more important factors in the mitigating this issue than any changes to KORUS.  The marketplace effectively took these actions well before President Donald Trump won his party’s nomination for office.

If present trends continue, the U.S.-Korea bilateral trade deficit for 2019 could drop even further to below $3 billion.  Already, U.S. merchandise exports to Korea in January increased 5 percent over January 2018 levels.  However, past behavior is not an indicator of future performance.  There could be other macroeconomic factors, unrelated to any trade agreement, which could reverse these trends, such as a fluctuation in the U.S. dollar-to-Korean won exchange rate.  That is why a fixation on the trade balance is an imperfect indicator of the health of any U.S. economic relationship.

Nonetheless, as Korea presently represents less than 1 percent of the overall U.S. trade deficit with the world, now is not the time to further threaten America’s stalwart ally with higher tariffs on imported motor vehicles and parts.  By all metrics – rise in jobs, U.S. export growth, fostering inward investment, and reducing the trade imbalance – the KORUS FTA is working as intended.  Thus, in light of all that Korea has done to mitigate the irritant in the trade imbalance with the U.S. to placate the Trump Administration, including agreeing to modifications to KORUS, Korea should be exempted from possible higher tariffs in imported autos and parts.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.