ALS: thoughts on freedom

Korea & free trade

A few weeks ago I entered an essay contest for the Korean english-language daily newspaper on the topic of “Korea as a financial hub”. I decided to stick to what I know and wrote about Korea’s need to embrace freer trade and especially remove their farm subsidies.

I just discovered that I won. The essay will be published on November 1 and I receive a return flight to Seoul, which is great because I was planning on heading back there early next year anyway. The article (1000 words) is below.

As we move forward in the 21^st century, Korea is perfectly placed to be at the forefront of international finance. Strategically positioned between Russia and America, and between China and Japan, Korea’s independence and vibrant indigenous culture allows it to bridge the cultural, economic and social divide of these major powers without being consumed by any of them. 

While no country is immune from the dangers of geo-political brinkmanship, Korea is perhaps in a better place than any other country to foster constructive relationships with the four north pacific powers and promote itself as a safe and logical hub for trade, finance and business. 

However, it takes more than a convenient position and cultural assets to maintain a position as a financial and commercial hub. Also vital are a strong economy and a well-earned reputation for being pro-trade and market friendly.

Korea has a proud trading tradition, which has lead to a strongly growing economy. Trade makes up 68% of GDP, with US$288.2 billion worth of goods and services exported to China (25%), the United States (15%), Japan (8%) and others. 

The benefits of this trade have made themselves clear in the economic indicators, with a GDP/capita of over US$20,000 (up from only US$100 in 1963), economic growth consistently around 5%, low inflation, low unemployment and a strong stock market.  

Clearly, Korea has already established itself through its trading tradition and growing economy as a vital player in trade and finance – but it is not enough to rest on previous performance. In the fast changing modern world, if you stand still you will fall behind. 

The current international trading environment is facing big challenges, and negotiating the consequent opportunities and threats will determine which countries will prosper. 

The recent collapse of the latest round of World Trade Organisation (WTO) negotiations, combined with the growth of bilateral trading agreements threaten to undermine the multilateral liberalisation that gives the greatest benefit to the world. 

For Korea to further advance its claim as a vital regional hub it is necessary to go past economic performance and begin to take a leading role in progressing world trade issues. There are a number of ways that this can be achieved. 

There is one action that Korea could take to both remove its greatest trading embarrassment and single-handedly breathe life back into WTO negotiations. Despite Korea’s proud record of trade in industrial goods, in the area of agricultural protectionism Korea is one of the worst offenders.  

The consequence of agricultural protection is higher food prices (the price of rice in Korea is four times average international price), less trade, less competitiveness, less growth, environmental damage and greater trade conflicts. In addition, agricultural protectionism is perhaps the largest single issue that prevents poor countries from developing. Poor countries, especially in Africa, have a comparative advantage in agriculture, but they are unable to exploit this advantage because rich countries prevent an even playing field.  

Many rich countries bias agricultural trade by giving massive subsidies to their farmers. According to the OECD, in the United States 16% of farmers income is made up by subsidies. In the EU, 32% of farmers income is made up by subsidies. But in a country with a proud tradition of trade, fair competition and hard work is it a point of acute embarrassment that Korean farmers get 63% of their income from the government. Korean farmers are given nearly 2/3rds of their income as a handout, and this unfair and wasteful subsidy hurts the Korean economy, international trade, the environment and poor countries. 

It is these same subsidies that are at the heart of the breakdown in global trade talks. As one of the worst offenders, Korea is uniquely placed to be able to kick-start talks by taking the bold and economically progressive step of offering to immediately reform its farm subsidies. Such a policy would move Korea to the centre stage of international trade dialogue and enhance the country’s appeal as a pro-trade and vibrant hub for commerce. 

The WTO isn’t the only game in town. Korea is a member of the Asia-Pacific Economic Cooperation (APEC), which has dedicated itself to removing all trade barriers by 2020 (for developing countries) or 2010 (for developed countries). While agreed in principle, progress towards these goals has so far been slow throughout most of the region. As the 4^th largest economy in APEC, Korea is appropriately placed to push for more tangible progress among APEC countries towards the Bogor goals. 

Another area of trade negotiations growing in importance is bilateral agreements. So-called Free Trade Agreements (FTAs) are a more complex and potentially dangerous area of policy reform, as FTAs (despite their name) are not necessary successful in promoting free trade. In this regard, it is perhaps necessary to look outside the box and consider new and unprecedented avenues for further trade liberalisation – such as an open-invitation, non-regional “international” FTA lead by a handful of pro-trade nations. Once again, Korea is ideally placed to promote such an idea and in doing so can help promote freer trade as well as further enhancing the country’s reputation for trade and commerce. 

International trade negotiations are at a cross-road. Without leadership and direction there is a real fear that international trade could return to the dark days of counter-productive mercantilist trade wars. With the collapse of the WTO Doha negotiations the time is ripe for a country such as Korea to stand up and help push forward the global trading agenda with innovative ideas.

Whether this is done through kick-starting the WTO through farm subsidy reform, pushing towards APEC liberalisation goals or instigating a progressive, open-invitation, non-regional international FTA – Korea has the opportunity to be a progressive force in the world and simultaneously confirm itself as a central hub for commerce and trade.

October 19, 2006 - Posted by John Humphreys | Economics