Trade Regulations and Protectionism in South Korea: Rebirth of the Hermit Kingdom?
Many Australians are annoyed by the “free trade deal” their government recently signed with Korea. Somewhat radically summarized, the Koreans get an Australian 5% import tariff on cars removed – and the Australians get to export beef into Korea. Nice for Korea, who has an automotive sector about 20 times larger than the one in Australia. Australian labor union leaders call it a “cows for cars deal.”
The Japanese aren’t happy with Korean bureaucrats either. JETRO (Japan External Trade Organization) reports that investments in Korea by Japanese organizations have plummeted from $378MM in 2012 to an annualized $290MM in 2013 ($218MM for the first nine months of 2013).
In contrast to the Australians, the head of JETRO’s office in Seoul commented that Japan does not plan to negotiate a bilateral free trade agreement with Korea if it joins the Trans-Pacific Strategic Economic Partnership (TPP).
Stated reasons for their displeasure with doing business in Korea include what the Japanese call the “six obstacles,” along with some specific examples:
- Environmental regulations: Chemical usage restrictions – and the slow bureaucratic process in getting approvals. Japan’s largest ($13 billion in revenue in 2012) chemical firm Shin-Etsu Chemical is not going to supply their products to Korea for this reason.
- Labor regulations: Working hour restrictions, taxation of fixed bonuses, and strident trade unions are other examples. Japanese suppliers to Hyundai suffered when labor strikes shut down Hyundai in Korea this past summer.
- High taxation: Corporate taxes are lower (than in Japan) but Korean tax collectors are more aggressive.
- Energy (electricity) shortages: Electrical availability is surfacing as a problem area – although the price levels are attractive (versus those in Japan), power outages and plant disruptions are becoming more common.
- Staffing shortages: Worker attitude toward factory work is another stated issue; fewer Koreans are interested in non-office work. Additionally, Koreans are far more interested in working for the Global 2000 and not for Tier 1 and Tier 2 mid-size and smaller firms. As a result, the Japanese say they might as well invest in other ASEAN countries.
- Strong won (weak yen): The weakened yen against the won doesn’t help either – the won has strengthened 30% year-over-year. Again, this makes other ASEAN investments more attractive.
Then there are the political issues between the two countries – for example, the dispute over the name of islands alternately called Takeshima (Japanese), Dokdo (Korean), and Liancourt Rocks (the English name). The naming convention difference persists even when using Chinese characters. The Japanese name is written as竹島 (bamboo island) and the Korean name is written 獨島 (the solitary or single island).
The two rocks (really, they are pathetically small) in the aggregate comprise no more than about 46 acres – which, for city dwellers, is about the size of a small farm suitable for a single family to operate. Since my in-laws were born in Korea, I’ll let you in on an illustrative “game” of words with Koreans. Just say something like “did you see how the Japanese used the ‘Sea of Japan’ label instead of the proper ‘East Sea’ name?” I can guarantee you that’ll get the emotions going! So yes, even though WWII and the Japanese annexation was a long time ago, emotions still run deep – at least in Korea.
Cultural issues aside (which are really just as silly as the Irish complaining over the Brits, or the Swedes/Danes/Finns/Norwegians getting worked up over each other – yes, you used to kill each other, but that was generations ago), you’d hope the Koreans will realize that they can’t take a mercantilist tack in a global economy. Get over it already – time to level the playing field instead! The time for hermit kingdoms is long gone.
We have our own, similar, issues here in the USA – which we wrote about last week.