Order Code RL30566
Report for Congress
Received through the CRS Web
South Korea-U.S. Economic Relations:
Cooperation, Friction, and Future Prospects
Updated July 18, 2002
Mark E. Manyin
Analyst in Asian Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
South Korea-U.S. Economic Relations:
Cooperation, Friction, and Future Prospects
Summary
Over the past decade, South Korea has emerged as a major economic partner for
the United States. Korea is the U.S.’s seventh-largest trading partner – ahead of
Western European countries such as France and Italy – and its sixth-largest export
market. Korea has also become a significant investment site for American
companies, which have poured nearly $10 billion into the country over the past three
years. The U.S. is Korea’s largest export market, second-largest source of imports,
and largest supplier of foreign direct investment.
Increased economic interaction has been accompanied by disagreements over
trade policies. The level of bilateral friction is principally affected by four factors:
the size of the U.S. trade deficit with South Korea; the state of the U.S. economy; the
progress of Korea’s economic reforms; and whether or not bilateral political or
security issues override bilateral trade considerations.
During Korea’s financial crisis in 1997 and 1998, the Clinton Administration
tended to mute its criticism of Seoul’s alleged barriers to foreign exports and
investors. Since the spring of 2000, however, the United States has intensified its
pressure on bilateral trade issues, protesting that Seoul has been unresponsive to a
host of longstanding U.S. complaints. In its annual report on foreign trade barriers,
issued in April 2001, the Office of the United States Trade Representative (USTR)
devoted 22 pages to South Korea, more than it did to any other country except Japan
and China. The shift in U.S. policy was due in part to the swings in the U.S.-Korean
trade balance; after enjoying three years of trade surpluses with South Korea, the U.S.
has run increasingly large bilateral trade deficits since 1998. As the U.S. economy
has slowed and Korea’s economic reforms have stalled, Congress became more vocal
on bilateral trade issues, particularly on semiconductors and automobiles.
Additionally, the months-long stalemates in North-South Korean and North Korean-
U.S. relations have dulled the acuteness of security issues in the U.S.-South Korean
relationship; Washington does not have to be as concerned that its trade policy will
jeopardize its own or Seoul’s negotiations with Pyongyang.
An interesting development over the past year has been that Washington and
Seoul appear to have become more adept at managing their trade disputes, so that
they tend to be less acrimonious than in the past. In large measure, this is due to the
quarterly, working-level bilateral trade meetings that were first held in early 2001.
This report summarizes the main issues in U.S.-South Korean economic
relations. It will be updated periodically.
Contents
U.S.-South Korea Bilateral Trade Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mid-1990s: U.S. Bilateral Trade Surplus . . . . . . . . . . . . . . . . . . . . . . . 1
1998-2002: U.S. Bilateral Trade Deficit . . . . . . . . . . . . . . . . . . . . . . . . 1
Foreign Direct Investment Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Bilateral Investment Treaty Negotiations . . . . . . . . . . . . . . . . . . . . . . . 4
A Possible Korea-U.S. Free Trade Area (FTA) . . . . . . . . . . . . . . . . . . . 4
Major U.S. Trade Disputes with South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Intellectual Property Rights Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Agricultural Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Assistance to Hynix Semiconductor . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Korean’s Complaints Against U.S. Anti-Dumping and CVD
Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Figures
Figure 1. Korea’s GDP Growth
Sources: Bank of Korea, DRI-WEFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. Won:Dollar Exchange Rate (Average), 1997-2002
Source: Bank of Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Figure 3. Foreign Direct Investment in Korea, 1993-2001
Source: Ministry of Commerce & Industry . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Figure 4. Steel Imports from Korea
Source: International Trade Commission . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Tables
Table 1. Annual U.S.-South Korea Merchandise Trade . . . . . . . . . . . . . . . . . . . . 2
Table 2. U.S.-ROK Auto Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
South Korea-U.S. Economic Relations:
Cooperation, Friction, and Future Prospects
U.S.-South Korea Bilateral Trade Flows
Over the past decade, South Korea has emerged as a major economic partner for
the United States. Between 1990 and 2000, U.S.-Korean trade more than doubled
(see Table 1). In 2001, two-way trade (exports plus imports) was over $55 billion,
down 17% from the all-time high reached in 2000. For several years, South Korea
has been the U.S.’ seventh-largest trading partner and its sixth-largest export market
(after Canada, Mexico, Japan, Germany and the United Kingdom). Major U.S.
exports to South Korea include semiconductors, machinery (particularly
semiconductor production machinery), aircraft, agricultural products, and beef.
South Korea is the U.S.’ 4th largest market for agricultural products and 3rd largest
market for beef.
For decades, the United States has been Korea’s largest export market. Exports
to the U.S. accounted for approximately 20% of Korea’s total exports in 1999 and
2000. In recent years, exports to the United States accounted for around 5% of
Korea’s gross domestic product (GDP). Moreover, since Korea’s financial crisis in
1997, the United States has overtaken Japan as Korea’s largest supplier of imports.
Major U.S. imports from South Korea include electrical machinery (with
semiconductors typically accounting for nearly 20% of total South Korean shipments
to the U.S.), cellular phones, general machinery, automobiles, textile products, and
steel.
Mid-1990s: U.S. Bilateral Trade Surplus. As shown in Table 1, from
1994-1997 the U.S. ran a trade surplus with South Korea, after several years of trade
deficits. The surplus peaked at nearly $4 billion in 1996, the same year South Korea
became the U.S.’s fifth largest export market. The primary reason for the surplus
was a sharp rise in U.S. exports – which peaked at $26.6 billion in 1996 – propelled
by the boom in South Korea’s economy in the mid-1990s, which increased demand
for foreign products. The 60% rise in U.S. shipments from 1990 to 1997 more than
offset the 25% increase in U.S. imports from South Korea over the same time period.
1998-2002: U.S. Bilateral Trade Deficit. In the fall of 1997, South Korea
plunged into a serious economic crisis. In December of that year, Seoul and the
International Monetary Fund (IMF) agreed to the terms of a $58 billion financial
support package. As a quid pro quo for receiving IMF emergency loans, Seoul
agreed to tighten its fiscal and monetary policies and engage in far-reaching, market-
oriented reforms of its financial and corporate sectors, and of its labor market
policies. South Korea also agreed to open its economy further to foreign goods and
investors.
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Table 1. Annual U.S.-South Korea Merchandise Trade
(Billions of U.S. Dollars)
Total Trade
Year
U.S. Exports
U.S. Imports Trade Balance
(Exports +
Imports)
1990 $14.40
$18.49
-$4.09
$32.89
1991 $15.51
$17.02
-$1.51
$32.53
1992 $14.64
$16.68
-$2.04
$31.32
1993 $14.78
$17.12
-$2.34
$31.90
1994 $18.03
$19.63
-$1.60
$37.66
1995 $25.38
$24.18
$1.20
$49.56
1996 $26.62
$22.66
$3.97
$49.28
1997 $25.05
$23.17
$1.87
$48.22
1998 $16.49
$23.94
-$7.46
$40.43
1999 $22.04
$31.15
-$9.11
$53.19
2000 $26.30
$39.83
-$13.53
$66.13
2001
$20.89
$34.92
-$14.03
$55.81
Jan - Apr, 2001
$12.15
$ 7.56
-$4.59
$19.71
Jan - Apr, 2002
$11.15
$ 6.59
-$4.56
$17.74
Sources: 1990-1998 data from Global Trade Information Services. 1999-2001 data from U.S.
International Trade Commission.
Since Korea’s economic crisis, the U.S. has run an increasingly large bilateral
trade deficit with that country. Korea’s 1998 recession, during which time its gross
domestic product (GDP) shrank by 6.7% (see Figure 1), led to a sharp decline in
most countries’ exports to South Korea,
Figure 1. Korea’s GDP Growth
including those from the United States.1
Sources: Bank of Korea, DRI-WEFA
American imports from South Korea,
15
however, rose slightly in 1998 and
10.7
10
significantly in 1999 and 2000. These
8.8
6
increases were propelled by the strong U.S.
5
5
3
economy, which increased U.S. demand for
0
foreign goods and services, and by the
-5
devaluation of the won (see Figure 2), which
-6.7
made Korean products cheaper for Americans
-10
1997
1998
1999
2000
2001
2002 est.
to buy. In 2001, the slowing U.S. economy
led to a drop in Korean imports.
In 1999, when Korea’s economy grew by 10.9%, U.S. exports to South Korea
recovered somewhat. With Korea’s economy growing by over 9% in 2000, U.S.
shipments to Korea rose by more than 20% compared with 1999. Growth in imports
1 See Raymond Ahearn, South Korea’s Economic Prospects, CRS Report RS20041,
February 1, 1999.
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from Korea (up by nearly 30% in 2000), however, continued to outstrip U.S. export
growth, causing the trade deficit to widen. The deficit further expanded in 2001.
U.S. exports decreased in large measure because of Korea’s sharp economic
slowdown and the effects of the Korean won’s devaluation (see Figure 2). The sharp
devaluation of the dollar against the won (and other major currencies) in the late
spring and summer of 2002 may reduce the deficit.
Figure 2. Won:Dollar Exchange Rate (Average), 1997-2002
Source: Bank of Korea
900
951
1000
1100
1131
1189
1200
1223
1266
1291
1300
1319
1399
1400
1997
1998
1999
2000
2001
04/02
05/02
06/02
Foreign Direct Investment Flows
As part of its commitment to the IMF in December 1997, Seoul pledged to
eliminate most restrictions on foreign direct investment (FDI). The government of
President Kim Dae Jung, who was elected during the nadir of Korea’s financial crisis,
has moved aggressively to liberalize Korea’s foreign investment regime. Partly as
a response to Kim’s reforms, and partly in response to the lower prices of Korean
assets following the 1997 crisis, FDI flows have increased markedly, soaring from
$3.2 billion in 1996 to $15.7 billion in 2000, before falling to $11.9 billion in 2001.
American companies have invested nearly $10 billion in South Korea over the past
three years. U.S. FDI in 2001 alone was greater than total U.S. FDI in Korea from
1993 to 1996. In 2001, U.S. firms resumed their historical position as the leading
source of FDI into Korea. From 1998-2000, European firms had supplanted their
American counterparts at the number one position.
Despite the increased openness to foreign ownership, a number of high-profile
acquisitions by foreign companies have been either delayed or cancelled, due to
nationalistic objections to the sale, disagreements over the sales price, and/or the
discovery of previously undisclosed debts owed by the Korean suitor.
For the first half of the 1990s, annual South Korean FDI in the U.S. ranged from
$350 million to $535 million. After soaring to $1.57 billion in 1996, Korean FDI fell
to $729 million in 1997 and $874 million in 1998.2
2 Organization for Economic Cooperation and Development, International Direct Investment
Statistical Yearbook 1999.
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Figure 3. Foreign Direct Investment in Korea, 1993-2001
Source: Ministry of Commerce & Industry
16
15.54
15.69
14
s 12
11.87
llar
o 10
D
8.85
8
6.97
6
Billions of
4
3.75
3.89
3.20
3.19
2.97
2.92
2
1.94
1.04
1.32
0.34
0.31
0.65
0.88
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
Total FDI in Korea
U.S. FDI in Korea
Bilateral Investment Treaty Negotiations. For several years, the U.S. and
South Korea have been discussing a bilateral investment treaty (BIT). BITs are
designed to improve the climate for foreign investors – typically by committing the
signatories to prohibit discrimination against foreign investors – by establishing
dispute settlement procedures and by protecting foreign investors from performance
requirements, restrictions on transferring funds, and arbitrary expropriation. The
U.S. has signed over 30 BITs, primarily with countries undergoing significant
economic reforms. The U.S. and South Korea last held formal negotiations in 1999.
The major stumbling block is Korea’s so-called “screen quotas,” which are limits on
the dates and screen time given to foreign films. Foreign ownership in the Korean
telecommunications industry and Korea’s copyright rules also remain outstanding
issues.
A Possible Korea-U.S. Free Trade Area (FTA). In recent years, there
have been some calls for the U.S. and Korea to negotiate a free trade area, which
would lower trade barriers between the two countries. The idea enjoys the support
of the American business community in Korea, and many Korean businesses
operating in the U.S. In the Senate, Max Baucus introduced legislation in May 2001
(S. 944) authorizing FTA negotiations with Seoul, the second time he has presented
this initiative. No legislative action was taken on his first attempt, S. 1869,
introduced in the 106th Congress. To date, no formal government-to-government
discussions have been held over an FTA. Speaking in December 2001, U.S.
Ambassador to Korea Thomas Hubbard said that a Korea-U.S. FTA is not on the
Bush Administration’s short-term policy agenda.
In 2001, at the request of the Senate Finance Committee, the International Trade
Commission conducted a fact-finding investigation on the likely economic impact
of a South Korea-U.S. FTA. The ITC’s final report estimated that within four years
after implementation of an FTA, U.S. exports to Korea would increase by 54% while
U.S. imports would rise by 21%. In the short run, the biggest beneficiaries would
likely be those industries in both countries that face high initial trade barriers. On the
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U.S. side, the ITC found that bilateral agricultural exports would increase by more
than 200%. For Korea, the ITC projected that textiles and apparel exporters would
see their shipments to the U.S. rise by 125%.3 Thus, the report implied that the
FTA’s potential benefits would be greatly diluted if these politically sensitive sectors
were excluded.4
Overall, the ITC estimated that within four years after implementation of an
FTA, U.S. GDP would increase by approximately 0.2%, while Korean GDP would
rise by 0.7% as a result of the FTA.5 An earlier study by the Institute for
International Economics (IIE), found similar effects for the U.S. economy, but had
a wider band for the increase on Korean GDP, which was projected in the 0.4%-2.0%
range. As in the ITC study, the IIE report found that most of the benefits to U.S.
firms would derive from increased access to Korea’s market. In contrast, the IIE
projected that most of Korea’s gains from an FTA would stem not from preferential
access to the U.S. market but from improvements in the allocative efficiency of the
Korean economy brought about the trade reforms required by an FTA.6 President
Kim also has discussed publicly his desire to negotiate FTAs with Japan and Chile,
presumably to give further impetus to the economic reforms he initiated.
Major U.S. Trade Disputes with South Korea
During the Asian financial crisis in 1997 and 1998, the U.S. tended to mute its
criticism of South Korea’s alleged barriers to foreign companies. Since the spring
of 2000, however, the U.S. has intensified its pressure on trade issues, protesting that
Seoul has been unresponsive to a host of longstanding U.S. complaints. In its annual
report on foreign trade barriers, issued in April 2001, the Office of the United States
Trade Representative (USTR) devoted 22 pages to South Korea, more than it did to
any other country except Japan and China. A year earlier, the USTR cited Korea as
a “priority watch country” under “Special 301” (Section 182 of the Trade Act of
1974) because it deems Seoul’s enforcement of intellectual property rights to be
unsatisfactory. Korea remains on this list. In the spring of 2001, U.S. negotiators –
frustrated by the lack of progress in bilateral talks – proposed that the two countries
hold quarterly, working level, interagency “stocktaking” meetings to discuss progress
on and strategies for settling major bilateral trade disputes. Korea’s Ministry of
Foreign Affairs and Trade accepted, and both sides credit the meetings with creating
a more constructive dialogue by serving as “action-forcing” events.
Congressional interest in U.S.-Korean trade relations also has increased in
recent months. After introducing no major Korea-related economic legislation in
2000, in 2001 and 2002 Members of Congress have introduced a number of measures
3 United States International Trade Commission (ITC), U.S.-Korea FTA: The Economic Impact of
Establishing a Free Trade Agreement (FTA) Between the United States and the Republic of Korea,
(Washington, DC, 2001), p. 5-1 - 5-2.
4 For a similar argument, see Choi and Schott, Free Trade, p.80.
5 ITC, U.S.-Korea FTA, p. x-xi.
6 See Choi and Schott, Free Trade, p. 79-82.
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complaining about alleged Korean trade barriers and allegedly unfair subsidy
policies.
Below are brief descriptions of several major sector-specific disputes between
the U.S. and South Korea. In general, U.S. exporters and trade negotiators identify
the lack of transparency of Korea’s trading and regulatory systems as the most
significant barrier to trade with Korea, in almost every major product sector.
Automobiles. South Korea, the world’s fourth-biggest producer of
automobiles, has long maintained a variety of barriers to the import of automobiles,
including a ban on Japanese automobiles and the auditing of the income taxes of
individuals who purchased foreign luxury cars. The ban on Japanese automobiles
was eliminated in 1999. In its October 1997 Super 301 report to Congress, the
Clinton Administration designated Korea as a “Priority Foreign Country” for its
barriers to foreign motor vehicles.7 USTR subsequently initiated an investigation
under Section 301 of the U.S. Trade Act of 1974, as amended, and issued a call for
bilateral consultations to provide fair market access for foreign autos in Korea.8 In
1998, the U.S. and South Korea signed a Memorandum of Understanding (MOU) on
foreign access to Korea’s auto market, which led the USTR to terminate the Section
301 investigation. Under the MOU, Seoul agreed to reduce its tariffs on motor
vehicles from 80% to 8%,9 proactively address instances of anti-import activity in
Korea, lower or eliminate many automobile taxes, create a new financing system to
make it easier to purchase automobiles, and streamline its standards and certification
procedures. Many of these steps – including lowering tariffs – have been
implemented.
7 Super 301 (Section 310 of the 1974 Trade Act) requires the USTR to report to congress
on “priority foreign countries” that practice unfair trade and “priority practices” that have
the greatest effect on restricting U.S. exports. If agreement is not reached on the priority
practices, the USTR is required to initiate a Section 301 case (see the following footnote).
For more information, see Wayne Morrison, Section 301 of the Trade Act of 1974, CRS
Report 98-454. See also Gwenell Bass, U.S.-South Korea Auto Talks, CRS Report 97-1030,
December 4, 1997.
8 Section 301 (sections 301-309 of the Trade Act of 1974) authorize the USTR to initiate
investigations of foreign trade practices that allegedly discriminate against U.S. commerce.
If a settlement with the foreign country is not reached following the initiation of the
investigation, the USTR decides whether or not to retaliate, usually in the form of 100%
tariffs on selected imports from the offending country. See CRS Report 98-454, Section 301
of the Trade Act of 1974, by Wayne Morrison.
9 By way of comparison, the U.S. tariff on passenger vehicles is 2.5%. The Japanese tariff
rate is 0%.
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Table 2. U.S.-ROK Auto Trade
(number of vehicles)
1999
2000
2001
Korean Auto Companies’
410,000
573,000
618,000
Exports to the U.S.
U.S. Auto Companies’
739
1,214
1,500
Exports to Korea
Source: American Chamber of Commerce in Korea
In the spring of 2000, the USTR criticized South Korea’s compliance with some
areas of the MOU, and called on Seoul to take additional steps – outside the MOU
– to open the auto market. Foreign market share for autos remains extremely low at
approximately 0.37%, compared with 5% in Japan, 25% in the European Union, and
30% in the United States.10 Meanwhile, led by Hyundai Motors, Korean auto
manufacturers exported over 600,000 vehicles to the United States in 2001.11 U.S.
officials and businesspeople attribute the poor sales in Korea to a “buy Korea”
mentality among most Koreans, protectionist statements made by high level Korean
government officials, high tariffs and auto taxes, onerous standards and certification
rules, and a perception among Koreans that their income taxes will be audited if they
purchase a foreign automobile. The U.S. government and auto executives have
called on the Korean government to take more visible steps to encourage purchases
of foreign cars and to rewrite Korean regulations to reduce the barriers to foreign
autos. Most recently, U.S. initiatives have focused on pressuring Seoul to lower its
8% tariff on autos to 2.5%.
Korean officials contend that few foreign vehicles are sold because of the
decreased purchasing power of Korean consumers since the crisis (foreign autos cost
considerably more than Korean models), the lack of advertising by foreign auto
manufacturers, and Korean consumers’ preference for smaller vehicles. The
finalization in April 2002 of GM’s long-anticipated takeover of Daewoo Motors may
help to increase the sales of U.S. autos in Korea.
U.S.-Korean consultations on the MOU have been held regularly in recent
months, but without any new progress reported. One obstacle appears to be paralysis
in the Korean government; with President Kim Dae Jung’s popularity at an all-time
low, governmental authorities appear unwilling to take the high-profile, politically
unpopular, steps to encourage more automobile imports. It is unclear whether the
completion of General Motors’ takeover of Daewoo Motors – a deal that is in the
10 According to the American Chamber of Commerce in Korea, of the more than 1 million
automobiles sold in Korea in 2000, 4,414 were foreign-made. See American Chamber of
Commerce in Korea, Improving Korea’s Business Climate. Recommendations from
American Business 2001, p.50-52.
11 In April 2002, Hyundai Motors announced it would build a $1 billion production plant
in Alabama.
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final stages of negotiation – will alter Korea’s auto imports. During his summit with
President Kim in February 2002, President Bush raised the automobile trade issue.
H.Con.Res. 144 and S.Con.Res. 43, introduced in May 2001, call on South
Korea to end the practices that impede foreign market access, and request various
U.S. executive agencies to monitor Korea’s progress on this issue.
Pharmaceuticals. Korea is ranked in the world’s top 15 pharmaceutical
markets, with sales approaching $4 billion annually.12 Imports comprise
approximately 20% of the total market. For years, the U.S. government has raised
complaints about a number of Korea’s pharmaceutical policies, which it describes as
“onerous,” non-science based, and designed to protect the domestic Korean
industry.13 Criticisms have mounted since 2001, when the Korean government began
to implement a series of emergency measures to fill the national health insurance
system’s mounting deficit. Recent complaints include: poor protection of
intellectual property rights for medical patents; the lack of transparency of the Korean
Ministry of Health and Welfare, particularly with regard to reimbursement policies
for prescription drugs in Korea’s new national drug program; the vagueness of a July
2000 Korean law requiring that “cosmeceuticals” – cosmetic products that have a
functional or therapeutic effect – be reviewed for safety and efficacy; and the
discriminatory nature of Seoul’s requirements that foreign drugs must be retested on
Koreans living in Korea, rather than on other ethnic Asians, as the U.S. has insisted.
Intellectual Property Rights Issues. Bilateral tensions often have arisen
over U.S. allegations that Korea does not sufficiently protect intellectual property
rights (IPRs). In 1999, the U.S. praised Korea for making significant efforts to
strengthen its IPR laws, a result of Seoul becoming a signatory to the World Trade
Organization Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPs) in 1994. The USTR downgraded Seoul from Special 301 “priority watch
list” in 1997 to “watch list” in 1998.14 In May 2000, however, Korea was elevated
back to the “priority watch list,” due to concerns about inadequate protection of
rights in the pharmaceutical industry, continued piracy of computer software, and
new (December 1999) revisions to Korea’s copyright laws. In 2000 and early 2001,
the Korean government took many steps to improve the enforcement of its
intellectual property rights regulations, particularly those pertaining to the computer
12 American Chamber of Commerce in Korea, Improving Korea’s Business Climate 2002,
p. 148.
13 United States Trade Representative, 2001 National Trade Estimate Report on Foreign
Trade Barriers, p. 288, 294-96.
14 “Special 301” refers to Section 182 of the Trade Act of 1974. Since the start of the
Special 301 provision in 1989, the USTR has issued annually a three-tier list of countries
judged to have inadequate regimes for IPR protection, or to deny access: 1) priority foreign
countries are deemed to be the worst violators, and are subject to Section 301 investigations
and possible trade sanctions; 2) priority watch list countries are considered to have major
deficiencies in their IPR regime, but do not currently warrant a Section 301 investigation;
and 3) watch list countries, which maintain IPR practices that are of particular concern, but
do not yet warrant higher level designations. See Morrison, Section 301 of the Trade Act
of 1974, CRS Report 98-454.
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software industry. Citing these moves, in 2002, USTR again downgraded Korea to
“watch list” status.15
Agricultural Issues. U.S. agricultural exporters have long complained about
high tariff and non-tariff barriers maintained by Korea, which is the United States’
fourth largest market for agricultural products, to protect domestic Korean producers.
Approximately 44% of Korea’s farm imports in 2000 came from the United States.16
In September 2001, Washington and Seoul settled their most contentious agricultural
dispute in recent years, when the U.S. accepted Korea’s abolition of its requirement
that imported beef be distributed and sold through different channels than domestic
beef. In 2000, a dispute settlement panel requested by the U.S. and Australia had
ruled that Korea’s beef import system discriminated against foreign suppliers. South
Korea is the United States’ third largest market for beef.
Although the beef dispute has been temporarily settled, several other
disagreements linger. The U.S. has criticized the clarity of Korea’s new labeling and
rule of origin requirements for genetically modified foods, and President Bush raised
the issue in his February 2002 summit with South Korean President Kim. Bilateral
consultations appear to have partially resolved the dispute. Significant market access
barriers allegedly remain on foreign citrus products and rice. In the fall of 2001,
Korea for the first time tendered a contract for imported rice to a U.S. company. The
U.S. has also charged that Korea’s quarantine policies and mandated shelf-life
requirements are barriers to imports. U.S. agricultural groups contend that Korea’s
import certification requirements and testing standards are unduly onerous.17
Steel. For years, South Korean steel exports to the United States have been one
of the most politically charged items on the bilateral economic agenda, particularly
since the 1997 Asian financial crisis. From 1997 to 1998, Korean shipments of steel
to the U.S. surged by 109%, vaulting South Korea into the top five U.S. sources of
steel imports. Although Korea’s steel exports to the U.S. have declined since 1998
(see Figure 4), they have not returned to pre-crisis levels. For the first six months of
2001, Korean exported just under 1.3 metric tons of steel to the United States, a
22.4% year-on-year decline, in line with a general decline in U.S. steel imports.
In response to the 1998 surge from Korea and other steel-producing countries,
Congress joined major U.S. steel manufacturers in pressuring the Clinton
Administration to take action. President Clinton granted safeguard relief (under
Section 201 of the Trade Act of 1974) for U.S. producers of steel welded line pipe
and wire rod, a move that raised tariffs on imports of those products.18 In September
1 5 United States Trade Representative, 2002 Special 301 Report,
[http://www.ustr.gov/reports/2002/special301.htm].
16 ITC, U.S.-Korea FTA, p.3-10.
17 Caroline Cooper, “KEI Trade Brief. U.S.-Korea Bilateral Trade Relations,” July 2002.
18 Section 201 relief, often referred to as “safeguard” or “escape clause” relief, is defined
in sections 201-204 of the Trade Act of 1974, as amended (19 U.S.C. 2251-2254).
Safeguard relief provides for temporary duties, quotas, or other restrictions on imports that
(continued...)
CRS-10
2000, Korea challenged the Section 201 action in the World Trade Organization
(WTO). In October 2001, the WTO panel ruled that the Korean claims were partly
valid. The U.S. has appealed the ruling. A decision is due in February 2001.
The Clinton Administration also imposed anti-dumping duties on Korean
exports of stainless steel plate
Figure 4. Steel Imports from Korea
in coils and stainless steel
Source: International Trade Commission
sheet and strip. Seoul
4
protested these duties WTO,
and a dispute settlement panel
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panel ruled against the United
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States’ methodology used to
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o
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calculate the margin of
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dumping in the case, and the
U.S. subsequently agreed to
1
1996
1997
1998
1999
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2001
abide by the ruling.
President Bush’s Section 201 Steel Investigation. Steel became an
even more prominent trade issue in June 2001, when President Bush initiated a
Section 201 investigation of the effects of imports of over 600 steel products on the
U.S. steel industry. In December 2001, the U.S. International Trade Commission
(ITC) recommended that the President grant the U.S. industry relief through a variety
of trade remedies – including increased tariffs – for imported steel products
representing a majority of U.S. imports. Three months later, President Bush
announced trade remedies (higher tariffs and in some cases quotas) for almost all of
the products for which the ITC had found substantial injury. All remedies will be of
three years’ duration, and will decline over that period. Tariffs for some products
will rise to 30% in the first year.19 The President will make final decisions on
specific product exemptions over the next 120 days.
Higher duties are expected to have a substantial, but not devastating, impact on
Korea’s steel industry in part because many of Korea’s major export items to the
United States were excluded from the Section 201 investigation. Additionally, in a
major concession, Pohang Iron & Steel Co (POSCO), the world’s second-largest
18 (...continued)
may be traded fairly, but that enter in such quantities as to cause or threaten to cause serious
injury to a domestic industry. The relief is intended to give the domestic industry an
opportunity to adjust to the new competition and remain competitive. Within six months
after a Section 201 petition has been filed with the International Trade Commission, the ITC
must conduct an investigation, determine if relief is warranted, and recommend appropriate
remedial action from a specified range of options. The President then decides whether to
implement the recommended measure, apply an alternative measure, or take no action at all.
19 For more on the Section 201 case, see CRS Report RS21152, Steel: Key Issues for
Congress, by Stephen Cooney.
CRS-11
steel producer, received an exemption from President Bush for up to 750,000 metric
tons (827,000 short tons) of crude steel exports to its California joint venture with
U.S. Steel, equivalent to about one-third of Korea’s total steel exports to the United
States in 2000 and 2001.20 The Korea Iron and Steel Association (KOSA) estimates
that the higher duties will reduce Korea’s exports to the U.S. market by 20% in 2002,
costing the industry between $200 million - $300 million. Seoul has joined the
European Union and Japan in challenging the Section 201 decision in the WTO.
Korean Government Ownership of the Steel Industry. From time to
time, Congress has called on the Korean government to end its ownership of some
steel firms and subsidization of others. The October 1998 omnibus spending bill
(P.L. 105-277), for example, directed (section 621) USTR to monitor and report upon
the Korean government’s support for Korean producer Hanbo Steel, the insolvency
of which in 1997 helped precipitate the country’s financial crisis later that year.21 In
2000, a consortium of U.S. investors abandoned its attempt to purchase Hanbo for
$480 million, reportedly because a number of its demands had not been met by the
government-controlled entity that is managing Hanbo. Japan’s Yamato Steel is
considering a take-over of Hanbo.
For years, the U.S. has demanded that the South Korean government reduce its
ownership of the Korean steel industry. Most prominently, the U.S. has called on
Seoul to fully privatize Pohang Iron & Steel Co (POSCO), the world’s second-largest
steel producer, which has been accused of using government subsidies to dump steel
in the U.S.22 In October 2000, the Korean government partially met U.S. demands
by selling off the remaining 6.84% stake held by state-run Korea Development Bank
(KDB), formerly the majority shareholder in POSCO. Shortly before the sale, the
government also scrapped its rules limiting individual owners to a 3% stake in
POSCO. Seoul now contends that the privatization of the steel-maker is complete.
Korea, however, has not yet met the United States demand that the Korea Industrial
Bank – which is 98% owned by the Korean government – divest its 3% stake in
POSCO. Foreign interests now own a majority of POSCO’s shares. POSCO
dominates the Korean steel industry, accounting for over 60% of the nation’s crude
steel output in 1999.23
Assistance to Hynix Semiconductor. In 2001, a major trade dispute
nearly erupted between the United States and South Korea over allegations that the
Seoul government was propping up Hynix Semiconductor, presently the world’s
third-largest producer of dynamic random access memory (DRAM) semiconductor
chips. Last year, Hynix’s leading creditors – most of which are owned by the Korean
government – orchestrated a series of rescue packages that have kept Hynix in
20 The exemption is contained in section b:xxiv of the annex to President Bush’s
proclamation. The proclamation and the annex can be found at [http://www.usitc.gov/steel].
21 See CRS Report RL30073, The Steel Import Surge: Causes and Proposed Remedies, by
Gwenell Bass.
22 See Chapter 3 of the U.S. Department of Commerce’s report, Global Steel Trade,
available as of October 4, 2000 at [http://www.ita.doc.gov/media/steelreport726.htm].
23 ITC, U.S.-Korea FTA, p.3-23.
CRS-12
business by enabling it to restructure its 8.6 trillion won (over $6.5 billion) in debt.
In the U.S., Micron Technology, the Idaho-based second largest producer of DRAMs,
led a campaign against the support packages, arguing that they amounted to
government-sponsored bailouts that allow Hynix to export at low prices and that they
were a prime cause of the drastic plunge in global chip prices in 2001. Micron, the
last U.S.-based DRAM producer, threatened to file countervailing duty and anti-
dumping petitions. Prodded by Micron and some Members of Congress,24 the Bush
Administration raised the matter in bilateral and multilateral meetings with South
Korea and considered requesting that the World Trade Organization establish a
dispute settlement panel to investigate. The Korean government has presented
evidence that the decisions on whether to aid Hynix have been in the hands of the
company’s creditors.
The economic stakes are high. U.S. and South Korea trade in DRAMs totaled
almost $3 billion in 2000, nearly twice the value of the two countries’ trade in iron
and steel products. Semiconductors as a whole are the number one U.S. import from
and export to Korea. Furthermore, the Hynix packages call into question the Korean
government’s commitment to economic reforms, which are designed to make Korean
conglomerates more responsive to market pressures and end the past practice of
rescuing troubled conglomerates considered “too big to fail.” Hynix accounts for an
estimated 4% of South Korea’s exports. Over 150,000 Koreans are employed by
Hynix and its network of suppliers.
In early December 2001, the impetus for the dispute was suddenly removed –
at least temporarily – by the announcement that Micron and Hynix had begun
negotiating a possible strategic alliance. In April 2002, the two sides announced that
Micron would acquire Hynix’s DRAM business for $200 million and over 100
million shares of Micron stock. Hynix’s board, however, vetoed the deal, arguing
that the sale price was too low and that the recent rise in global chip prices meant that
Hynix’s DRAM business could survive independently. Subsequently, the Korean
government pledged that it would not bail out the company and Hynix’s creditors –
most of whom backed the deal with Micron – exercised their right to take
management control of Hynix, and appear to be preparing to restructure the company.
Micron has stated that it no longer has any interest in acquiring Hynix or any of its
constituent parts.
Korean’s Complaints Against U.S. Anti-Dumping and CVD
Practices. For over a decade, South Korea has chafed at the United States’ use of
anti-dumping and counter-vailing duty (CVD) laws to raise tariffs on Korean exports.
According to Choi and Schott’s study, in July 2000 the five CVD and 18 anti-
dumping orders against South Korean exports covered approximately $2.5 billion,
24 For instance, in September, an amendment sponsored by Senator Larry Craig protesting
the “Republic of Korea’s improper bailout of Hynix” was incorporated into the Senate’s
version of H.R. 2500, the appropriations bill for Commerce, Justice, and State. The
legislation notes that in 1998, Congress inserted a provision into the Omnibus Fiscal 1999
Appropriations Act (H.R. 4328, P.L. 105-277) requiring that the 1997 IMF $58 billion
assistance package to Seoul not be used to support South Korean companies that compete
unfairly with U.S. companies. The Craig amendment was stripped from the bill in
conference.
CRS-13
or over 7%, of U.S. imports from South Korea in 1999. Moreover, these tariff hikes
have tended to be concentrated in a handful of Korean industries – semiconductors,
steel, televisions, and telecommunications equipment – that have considerable
political influence in Seoul.
During the Uruguay Round (1986-1993) of the General Agreement on Tariffs
and Trade (GATT, the WTO’s predecessor organization), Korea was one of several
countries demanding revisions to global anti-dumping rules, changes the United
States opposed because of fears they would constrain U.S. anti-dumping
investigators. South Korea, joined most prominently by Japan, has taken up this
issue again in the WTO’s current round of negotiations, against U.S. opposition.25
In recent years, Seoul has become more assertive in using the WTO to challenge
United States’ trade practices. In 1999 and 2000, Seoul took the U.S. to the WTO
over allegedly discriminatory U.S. anti-dumping duties placed on Korean exports of
steel and semiconductors. Korea won both of the steel cases it initiated. In the
semiconductor case, in September 2000 Korea and the U.S. reached an agreement
whereby the U.S. dropped anti-dumping duties imposed against Korean dynamic
random access memory (D-RAM) chips. In exchange the Korean semiconductor
industry pledged to collect D-RAM price and cost data, and provide this information
to the U.S. if a new anti-dumping case is filed against Korean semiconductor imports.
The agreement preempted a WTO panel decision that was widely expected to rule
against the U.S., a ruling that could have required changes to U.S. anti-dumping
regulations. As part of the agreement, Korea asked that the WTO suspend its panel
covering the case.
Conclusion
The level of U.S.-South Korean trade friction is principally affected by four
factors: the size of the U.S. trade deficit with South Korea; the state of the U.S.
economy; the progress of Korea’s economic reforms; and whether or not political or
security issues override bilateral trade considerations. Since the spring of 2000 – a
period of rising bilateral deficits and a slowing U.S. economy – trade tensions
between Washington and Seoul have been rising, after a lull of about three years in
which trade disputes were deemphasized to focus on Korea’s recovery from its 1997
financial crisis. The change was more a result of shifting priorities on the U.S. side,
rather than an increase in the number of disputes, as virtually all current areas of
disagreement have been sources of tension for years.
For most of 1999 and 2000, with the notable exception of steel, the United
States’ focus on areas of trade friction was confined primarily to the executive
branch. The 107th Congress, however, has intensified its interest in U.S.-Korean
economic relations, principally on the issues of semiconductors and automobiles. In
late 2001, tensions over assistance to the Hynix Semiconductor – which some
25 Notwithstanding Korea’s position on anti-dumping, U.S. trade officials have praised their
Korean counterparts for their willingness to compromise and serve as a bridge to developing
countries during the November 2001 WTO Ministerial talks in Doha, Qatar.
CRS-14
Members of Congress closely tracked – very nearly caused a major trade dispute
between the United States and South Korea to erupt. Additionally, the months-long
stalemates in North-South Korean and North Korean-U.S. relations mean that
Washington does not have to be as concerned that its trade policy will jeopardize
Seoul’s negotiations with Pyongyang. However, in the near future, the growing
attention that the Bush Administration is placing on North Korea’s weapons of mass
destruction may mean that security issues will crowd out many economic issues that
otherwise would occupy a higher place on the bilateral negotiating agenda. This
phenomenon was seen during the February 2002 Bush-Kim summit in Seoul; the two
leaders’ debate over how to deal with North Korea left little time to discuss trade
matters. President Bush raised the issues of trade in automobiles and genetically-
modified organisms. President Kim expressed concern over the Bush
Administration’s Section 201 investigation of imported steel.26
An interesting development over the past year has been that Washington and
Seoul appear to have become more adept at managing their trade disputes, so that
they tend to be less acrimonious than in the past. In large measure, this is due to the
quarterly, working-level bilateral trade meetings that were first held in the spring of
2001. Both sides credit the meetings, which appear to be unique to the U.S.-South
Korean trade relationship, with creating a more constructive dialogue by serving as
“action-forcing” events.
26 Inside U.S. Trade, March 1, 2002.